No flexibility for the mutual fund manager.
If you purchase a large cap value mutual fund, the fund manager is legally obligated to only purchase stocks that meet those criteria. What if that asset class is not poised to perform well in the current economic cycle? In 2016, large capital value companies did very well. In 2017, the economic cycle shifted and large cap value companies under performed while large cap growth funds performed very well.
Passive management or buy and hold
The economic cycle should dictate how your money should be invested. The traditional stockbroker model of buy and hold may not allow you to capitalize on market up trends and could result in losses when the market trends downward. Asset management today means that someone is watching your money and prepared to make adjustments as long as those adjustments are done in your best interest. This is the fiduciary standard.
Under performing the bench marks
Recent data from S&P Dow Jones Indices showed that for the last 10 years 85.1% of large cap fund managers under performed against the S&P 500. For the last 15 years that percentage jumps to 91.6%. Cheaper indexed funds may provide more opportunity for upside earnings. The challenge is knowing which index fund best matches your goals.
Few people understand that mutual funds have two types of fees. The first is the expense ratio, which is how the fund manager is compensated. The second is 12-B 1 fee, which is what the fund manager charges to market and sell more of their fund. This is in addition to the management fees you are being charged by the bank, brokerage firm, or broker. These additional fees could add up to .5%-2% depending on the specific mutual fund.
For non-qualified assets, mutual funds may not be the most tax advantageous way for you to invest. A fund manager can adjust the holding of the fund by buying new assets and selling older assets. If the buy and sell occurred in less than a year, short term capital gains are triggered and taxed at ordinary income tax rates. If the assets were held for more than one year long term capitol gains taxes will range between 0-20% depend on your income level.
So what’s the solution? It depends on what is trying to be achieved. Remember to always have a clear-cut goal and make sure that goal matches the way you are invested. We welcome you to schedule a no cost consultation with our licensed fiduciary to help you evaluate whether mutual funds are right for you. Call (480) 428-8005 or CLICK HERE to schedule your one-hour appointment.
Written by Marc Montini, IAR and licensed fiduciary.