Mutual Fund Industry Tricks and Treats

1 Trick

The trickiest part to the mutual fund industry is the stark contrast between what fund management says and what it does.  They say to the investing public to “buy and hold” (preferably their fund), yet what they do is “buy and sell” all the time.  If we look at a fund’s internal turnover ratio, we find them buying and selling to the tune of ranging from 30% to more than 100% annually.  The turnover ratio is the amount of fund assets bought and sold versus the total assets.

This same disconnect between public advice and private action is true even with index funds like SPY, VFINX, and VBMFX.  Index funds may have smaller turnovers than active funds, yet they too tell us to “buy and hold” (their fund), while all the while trading daily, even as their indexes change frequently.

If their sage advice to the investing public is “buy and hold”, why aren’t they practicing the same thing?  The answer is that perhaps both active and passive managers recognize that there are forces like valuations, trends, and news that impact the markets and stocks.  As a manager of the fund managers, we too recognize these important things.

What They Say or What They Do

Thus the treat, the alternative to the trick, is to take the identical approach to their funds that they do to the markets.  They trade.  So do we.  They do not buy and hold.  Neither do we.

What we do is to rank their relative performance given their risk taken.  We then do as they do.  We buy the leaders and avoid the laggards with the realization that fund leaders, like the holidays, come into and out of prominence over the years and decades.  Forget the trick that comes from the scary “buy and hold” industry advice and replace it with the treat from proactively investing.  Buy the leaders and sell the laggards.

3 Treats

The treats of the mutual fund itself are many.  We can use the treat of buying and selling them based on our proprietary C rank, which is their risk-adjusted relative performance number.  But before that C-lect investing strategy is the nature of the mutual fund itself.

With one investment, we get three treats:  professional management, diversification, and low costs.

Every moment that the markets are open and even when they’re not, we know the fund personnel are actively watching the markets and news for impactful events and trying to make us money.  They do care about our investments.  They are fiercely competitive, battling for every last trading penny.

Even if you invest $1,000 into a fund, you benefit by participating in a pro-rata share of all the fund’s holdings.  For $1,000, you could own 1,000 different stocks or bonds.  Imagine going to one house and getting your bucket filled with all variety of treats.

Trading stocks and bonds is much less costly than it used to be.  You can trade for a mere $5.00 to buy and $5.00 to sell.  With a no-load mutual fund, however, it may cost you nothing to buy and sell.  Plus there’s the added benefit of buying it at its net asset value.  There is no slippage between what price you see and what price you buy or sell.  To be clear, internally to every fund are expenses like accounting, reporting, and personnel.  These expenses may range from 0.10% to 2.00% of assets.  But the performance numbers you see are net of these expenses.


Mutual funds, like nearly everything else in life, have their tricks and treats.  Fortunately we can do something about the tricks and still participate in the treats.


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