Mutual Funds: Bleak Year Brought Almost No Winners
Sunday, January 11, 2009
Here's how brutal 2008 was for mutual fund investors: The worst performing fund was down nearly 60 percent, the average financial fund declined 42 percent, and not one diversified stock fund bigger than $100 million ended the year with a gain.
Overall, the average mutual fund plunged 30 percent in 2008, and many didn't fare as well as the Standard & Poor's 500 stock index, which fell 38 percent for its worst year since 1937.
Mutual funds' dismal performance contributed to the anguish of retirement investors who saw the slump in their 401(k)s probably prolong their working lives. Disappointment understandably runs deep among investors who together have $9.4 trillion in U.S. mutual funds.
But painful as 2008 was, mutual fund investors fared better than many others. The financial crisis exposed a broad array of risks that crushed investors in other types of vehicles. The way mutual funds are structured and administered saved many investors from the worst of the market collapse.
"You do not see mutual funds imploding like hedge funds or like private equity funds, and there are several very good reasons for that based on government oversight and regulation," said Louis Lowenstein, a professor emeritus of finance and law at Columbia University.
Lowenstein published a book in April called "The Investor's Dilemma: How Mutual Funds Are Betraying Your Trust and What to Do About It." He takes a hard line on mutual funds. But he said that since his book's release, he has moderated his views somewhat, at least when comparing mutual funds to the alternatives.
He still thinks too many fund companies overcharge for their services, but he said he admires the transparency that mutual funds provide to investors. He also appreciates their "almost perfect liquidity," so that typically when you want to pull your money out, "you can call on Tuesday and have it by Wednesday."
The same can't be said of hedge funds and private equity firms, which disclose comparatively little about their holdings and often lock up client funds for months or even years at a time.
University of Mississippi law professor Mercer Bullard, a mutual funds shareholder advocate who has taken aim at the industry in the past, said the relative safety of mutual funds was underscored by the December discovery of Bernard L. Madoff's alleged $50 billion Ponzi scheme, which punctuated an already harrowing year for many who had waded into more exotic, less-regulated funds.
"At least with mutual funds, you have a public accountant certifying the financials, and you have mandatory diversification and an independent custodian," Bullard said. "Those factors will ensure that your investments will be there, even if they may decline."
Of course, diversification -- long a major selling point for mutual funds -- proved to be of little value in 2008 as investors found few places to hide.
"I think investors are beginning to realize that putting half your money in domestic stocks and half in small and international stocks is not a diversified portfolio," said Rob Arnott, chairman of Research Affiliates, which develops and licenses investment strategies for professional investing firms.