Our Losses are Mutual, Ma’am
What’s in your wallet? Remember those Capital one commercials. Catchy slogan.
I don’t recall any banking commercials asking “what’s in your mutual fund?”, I guess it doesn’t roll off the tongue nicely. Maybe it could catch on seeing how many people invest in mutual funds & walk away thinking they are safe for life. I know of dozens who still think like this.
I’m sure you know someone yourself who has transferred their funds from a checking or savings account into their bank’s mutual fund. After a quick look at around 10 mutual funds from Canadian banks you begin to see that you’re not “investing for your future”, you’re investing in the future of the zombie-fied monetary system. The same could be said about Pension Funds, but that’s a deep, deep rabbit hole.
I explain some reasons why they’re not as “safe” or “smart” as you think, But first:
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- Real returns are NOT Nominal returns.
Real Return = Inflation – Nominal returns. Quite simply, if inflation exceeds the performance in your “balanced portfolio”, you actually lost wealth. Said another way, the investments are going up and down in value but so is the currency it is denominated in. Your net performance or real return is this performance by the manager after you consider the performance of the currency. If you really want to get spooky, don’t use the government-doctored “consumer price index” as an inflation measure, use eggs or meat in your grocery store as the yard stick. We’ll see how to beat inflation in the subscription pathway. - How do portfolio managers stay around if they lose my money? It doesn’t make sense. It does when you understand this one thing
Fees. All these mutual funds have fees ranging for 0.35-3% for the amount of money they acquire inside the fund (and get to keep inside). The bigger the pot, the bigger the pay-out. A 50M fund, at 2% management fees is a 1M fee collectively taken from investors right off the bat. Between 4 managers equally, that’s 250,000 dollars effectively on the first day of the year (not including operating costs however). Although this is not including bonuses, paid incentives, their own investments inside the fund, among other sources. Funnily enough, there hits a point where they’re incentivized to be a salesman of the fund more than an investor/manager of a fund. So how mutual is it really? A question to ponder. - One piece of evidence they (broadly) don’t give a hoot about your money is they are heavily invested into bonds (which at the time of writing has lost a tremendous amount) In fact, I got into an argument with a money manager from Montreal about bonds, sure he got the best of me in the lip service but I didn’t have the brutal losses he did with his clients (2020-2021). Bonds impose a threefold risk to your capital at this moment. A) Like in #1, you have the inflationary risk, if the total coupons pay less than the inflation over that period of maturity, in real terms, you lost. B) Debts have never been higher, you are engaged in a default risk that the corporations or governments will not service/rollover their debts. Albeit this is unlikely as they can always “create dollars”,but the risk has never been higher especially with corporate debt C) Interest rate risks. Interest rates are up from where they were but historically they remain low. Either to control inflation, the central banks will have to raise interest rates OR due to high levels of inflation, people will dump bonds (selling bonds raises interest rates). It also doesn’t help that the bond market has been in a hyper bubble for some time as well.
[It’s worth mentioning that many have been buying bonds as a “wait and see” play to collect 5% or so]
The point I wish to make is that the “balanced” 50% bonds/50% equity portfolio is a dead strategy given the larger macroeconomic landscape–but the fund managers are full speed ahead with it. - They invest in themselves. Try this, take money out of your left pocket and put it in the right pocket. Would you tell yourself you made money? Maybe if it was someone else’s money to start. That’s what banks are indirectly doing. You pull your money from a chequing/savings account to think that it’s in a separate place whilst in a mutual fund–>which is just invested in the bank offering the mutual fund. The reality is that it just changed accounts at the bank, it went onto the shareholder’s equity side of their balance sheet as opposed to deposit liabilities where it was before. From your perspective, you’re still in their pocket & remain undiversified. You’re relying on the BANK.
- Overweighting in interest rate sensitive sectors. FIRE! no really… FIRE. Financial, Insurance, Real Estate sectors are all very sensitive to higher interest rates (& I believe the rates will be going higher in the long-run) and guess what have increased tremendously over the last year?
- Lastly, I encourage investors to spend the time to look at what these investors are holding in their portfolios. I’ve mentioned bonds & FIRE positions being a no-go right now, but for the mutual fund manager there is no harm in holding garbage equities. Did it get a news headline and does it sound sexy? Buy it! Is it ‘the next big thing?’ Buy it!
Want to know why? Because everyone else is too. If you were to invest in a Mutual Fund at Bank A and it were to incur significant losses, you as the investor cannot find fault with the manager because his reply will be “Well, sir, you could have taken your money to Bank B and received the same losses”. Mutual fund managers therefore have the strength in numbers by acting the same, independent of whether that is a poor investment or not. The madness of crowds.
Perhaps you’re inclined to say Ok, OnTheBall… but what about the mutual fund managers who break the trend & invest on their own basis? Which is to say, they choose all the right positions for my family and I.
There are only a few. Want to know why? Because again, if the markets really go against them—they run the risk of being the ONLY fund manager who incurs losses relative to everyone else. An investor can therefore fault the manager for their poor decisions relative to the pack of fund managers who act like robots. Having said that, the managers incur the benefits for their positive investment decisions too, but from the manager’s perspective—why risk it if you’re already getting a nice salary + the assets under management percentage slice mentioned in point 2? It’s much easier to follow the crowd.
If you feel like discussing this, feel free to contact me with your thoughts and learn what I’m doing instead of mutual funds.
In the meantime, #StayOnTheBall
