SmartMoney magazine recently released its list of the 100 “best time-tested” mutual funds. But as an article from the Motley Fool illustrates, this list looks anything but smart and could cost you money. 43% of the mutual funds recommended on this list have front-end sales loads averaging a lofty 5.4% of assets. In other words, for nearly 1 out of every 2 mutual funds you might select off this list, you would need the fund to increase in value by 5.7% just to get to breakeven.
This doesn’t sound like a smart investment strategy in any environment and seems particularly shaky in light of the average domestic equity fund losing 37.6% in 2008.
But wait, there’s more. Although, mutual funds love to boast about their past performance records and SmartMoney’s list claims to represent the funds with the highest total returns since 1987, the Motley Fool points out that the average management tenure for this list of funds is only 12.5 years and thus, “this means that the vast majority (85%) of the uber-impressive track records the funds on the list boast are in no way attributable to the current manager”. Put another way, assuming you actually think a fund manager can outperform the market (which is a topic for another day considering that ishares found 75% of active fund managers underperform on an annual basis), 85% of the current managers of the funds on this list didn’t have anything to do with the returns provided on the list.
Smart money to me is an investment vehicle that doesn’t have front-end loads and where returns aren’t tied to transient fund managers trying to outperform the market. ETFs anyone?
