Fortune Says Investing in Mutual Funds Isn't That Bad
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Wednesday, June 27, 2012

Fortune Says Investing in Mutual Funds Isn't That Bad

Active managers do beat the passive crowd after all. The challenge, according to a new study, is getting those results to shareholders without squandering the alpha delivered by PMs. Fortune reports on the study. (Obviously it takes the shareholder angle.) Another takeaway from the study is that, since scale matters, larger fund shops have an advantage over smaller ones.

Fortune's Stephen Gandel tells investors that "selecting an actively managed fund is a waste of time, though perhaps not money."

The National Bureau of Economic Research claims that individuals are good at picking funds that remain hot for some time and that managers earn their keep.

However, this doesn't necessarily translate to good news for fund investors. The study, Measuring Managerial Skill in the Mutual Fund Industry, co-authored by two finance professors from Stanford and Kellogg, focused on larger funds. In addition, well-performing funds also tend to increase their fees, quickly making any gains individuals reaped from selecting better managers moot.

On this point, Jonathan Berk, finance professor at Stanford University's graduate school of business, commented, "There are a lot of people who say active management is bad deal because investors have to pay a fee. What we found is that managers do make the fee up with their skill, and then take it away in compensation. So investors should be indifferent."

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