A Great Strategy for Mutual Funds

Posted in: Economics, General, Stock Market, Thought of the Week

Mutual funds served their purpose back in the 1980s and 1990s as effective vehicles to broadly diversify a retail investor’s portfolio. The accessibility and liquidity of these products made them an instant favorite amongst investors who chose to outsource the investment process to a professional money manager. By the end of 2011, the industry had amassed over $30 trillion in assets under management. However, despite their popularity, mutual funds are plagued with issues from exorbitant hidden fees to unfavorable tax implications.

Investors rarely benefit more from buying mutual funds vs. index funds, given that most fail to beat benchmarks after fees and cannot go to cash during times of despair. This idea inspired our Investment Committee to do a research assignment. They hypothesized a scenario where investors own the stock of the company managing the mutual fund, instead of owning the mutual fund itself. For instance, the investor would purchase the stock of Franklin Templeton, instead of the best performing mutual fund that Franklin Templeton offers. These mutual fund companies make enormous profits on fees (most of which are hidden to the investor), and those selling mutual funds make handsome commissions.

The analysis was conducted over a time period from May 2002 to August 2014. Our Investment Committee analyzed the five largest publicly traded mutual funds companies against each firm’s two largest mutual funds. The results for Franklin Templeton were as follows:

  Total Return Annualized Return
Largest Fund FRIAX 176.20% 8.60%
Second Largest Fund TEDIX 200.80% 9.30%
Franklin Templeton Stock BEN 391.60% 13.80%


In most cases, investing in the stock of a mutual fund company would have generated substantially higher profits than owning the funds managed by them. For example, investing in Franklin Templeton’s stock would have generated 391%, which is almost 2 times larger than either of their top mutual funds.

In other words, the stocks of mutual fund companies have performed so well because the business is an enormously profitable one due to exorbitant fees and layers of complexity that are designed to protect the interests of the funds. Rather than buying these companies’ products (mutual funds), history suggests that investors should consider buying the stock of the companies managing the funds. The bottom line is that Global Financial Private Capital is not a mutual fund company and these products are not used in any of their portfolios. Their investment philosophy was founded on the idea that institutional and retail investors should be treated as equals. They do this because the days of mutual funds are over.

Read this week’s Thought of the Week to learn more about mutual funds and their impact in the financial industry.

Click Here for the Weekly Thought

As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.