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About Medford mail tribune. (Medford, Or.) 1909-1989 | View Entire Issue (Aug. 30, 1962)
Study Reveals Mutual Funds Have Done No Better Than Stock Market Editor's Note: The opera tion of mutual fundi recently wai the subject of an exhaus live itudy. The following dis patch ii an analysis of how effective they are in investing for their shareholders in the slock market. By EDWARD COWAN United Press International Washington - il'FD - A major study of the mutual fund in dustry comes to the conclu sion that the funds as a group have done no better in the business of making money in the stock market than the market itself. That is, the funds' perform ance about equaled that of the Standard and Poor's 500 stock average. This comparison raises the provocative question of whether the average investor might not just as well play the market directly as indirectly by buying shares in a mutual fund. A mutual fund is an in vestment company whose bus iness is buying securities, chiefly common stocks. Examined Industry Prof. Irwin Friend, head of a four-man team at the Whar ton School of Finance, Uni v e r s i t y of Pennsylvania, which examined the mutual fund industry, said the ans wer to the question is this: If investors bought a ran dom selection of stocks listed on the New York Stock Ex change, they would on the average do as well as a mut ual fund. The word "average" in this case means the sum of losses by some of these in vestors and profits by others. Which gets to why people buy mutual funds. They don't want to choose which stocks to buy. They feel they don't know enough about the mar ket and they don't have the time or background to find out. Moreover, they don't have enough money to diversify their Investments for safety's sake to buy a sufficiently broad variety of stocks so that they don't have all their money in one or two in dustries. Sales Commission What about the 8 per cent sales commission most mutual funds charge? Can't the direct investor avoid that. For the small investor who can ill afford large risks, Friend said, achieving diver sification comparable to that given by a mutual fund could cost more in brokerage fees than 8 per cent. There also are the costs and inconven ience of bookkeeping, he noted. However, Friend observed that purchasers of "front end load" monthly investment plans may realize "only lim ited returns" if they drop the plan after one or two years. Because a sales commission figured over the life of the plan is deducted at th "front end," it may exceed 50 per cent of first-year pay ments and 30 per cent of pay ments in the first two years. Most people with a few hundred or even several thou sand dollars In a fund probab ly would conclude from the i study that, all things consid ered, they might as well leave their money in. Not a few un doubtedly are satisfied if they do only as well as the market at least on a rising market. Grown Enormously Since the first open-end in vestment company was formed in 1924, the mutual fund industry has grown enormously. After nearly be ing extinguished by the 1929 crash, the industry began to recover. Its great days came in the bull market after World War II. As of Dec. 31, 1961 there were 344 open-end mutual funds with assets of S24.4 bil lion. An estimated 5.3 million individuals were share hold crs. Open-end means no limit to the amount of money the fund can take in and invest. The Wharton school study of 189 funds, made for the Securities and Exchange com mission, is the most exhaust ive examination of the in dustry in more than 20 years. Although nominally analyt ical, it breaks out in several places with clearly implied criticism. Probably its most pointed observation is that there are "potential conflicts of inter est" in fund practices and in their affiliations with invest- MedfordTribune SECTION C MEDFORD, OREGON. THURSDAY, AUGUST 30, 1902 PAGES 1 to 10 ment advisers and stock brok' ers. Appear Higher The discussion of "potential conflicts of interest" was based on the funds' manage ments profiting excessively Three Local Men To Attend Convention Larry Rose, Walter L. Wil son, and Randy Hugdahl, members of the local branch of the National Association of Letter Carriers, will attend the 43rd biennial convention of the group. The convention will begin Sunday, Sept. 2, in Denver, Colo. William C. Doherty, Cin cinnati, will retire as presi dent of the NALC this year. He has served 30 years as a national officer and 22 years as president. at the expense of their share holders. More specifically, advisory and brokerage costs appear higher than they need be, especially for the larger funds. Lower costs could be reflected in increashed divi dends to shareholders. The funds undoubtedly will have more to say about this. They already have said that fees paid advisers, based on fund size, are inadequate when a fund is young and small. Therefore, it would be unfair to scale fees down as they grow with a fund, even though the cost of advising the fund rises less rapidly than the fee. Friend said his sludy team was making no ethical judg ment about funds, although he did say they encourage economic growth by lowering the cost of capital. He de clined to describe the 595 page report as either favor able or unfavorable to the industry. Old Time Cars To Be in Jubilee Event The Old Time Car club will participate in the Illinois Val ley Labor Day Jubilee in Cave Junction Sept. 3. Mem bers will meet at 10:15 a.m. and the parade will begin at 10:45 a.m. Members should wear old timer costumes. 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