The present (and future) of the fund industry

Investors are no longer willing to rely on fund-industry assurances

John Rekenthaler 05 December, 2016 | 16:11
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Seeing Is Believing

The fund industry, more than most, lends itself to evidence. Some company promises that it builds the best custom houses, or gives the best haircuts. Who is to know? One vendor’s claims may be compared with another’s. With fund sales, there shouldn’t be much room for blandishments.

Historically, though, funds have been moved largely through storytelling. Yes, the tales of a fund’s superiority were typically--although not always--attached to performance figures, but the results were rarely generated over enough time, with a sufficiently large margin of success, to be anything more than suggestive. Launch a new fund, beat the competition for a few years, proclaim loudly why that success will continue, collect incoming assets. Such has been the fund industry, for almost all of its existence.

In the past 15 years, that has changed, in a big way. The turning point was the technology crash of 2000-02. When the New Millennium began, most new fund assets--counting both conventional mutual funds and the newer exchange-traded funds--went into shares that had expense ratios of greater than 1%. The recipients were actively managed U.S. growth-stock funds, which boasted the customary attributes of sales winners: strong recent total returns and a narrative about why that dominance would continue.

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About Author

John Rekenthaler  is vice president of research for Morningstar.

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