The Nasty, Brutish Life of the Modern Mutual Fund Manager

The Nasty, Brutish Life of the Modern Mutual Fund Manager

It’s become one of the toughest sells of a fund manager: pay a fee to underperform the rest of the market.

Over the last three years, S&P calculates almost four in five domestic stock fund managers failed to beat broader indexes. Outdoing the market’s never been easy, especially after trading costs and fees. Now, more individual and institutional investors are concluding that active managers aren’t worth those extra fees. Last year, according to Cerulli Associates, $3.4 billion flowed into active funds, while index-based strategies pulled in more than $60 billion.


A new study suggests outperforming indexes has become even tougher. Even the smartest, best-informed managers are struggling to keep up. Professors at the University of Chicago’s Booth School of Business and University of Pennsylvania’s Wharton School analyzed how much managers contributed to fund returns. They found this measure of skill has tripled at the median fund, from adding about 0.01 percentage points per month in 1979 to about 0.03 percentage points in 2011. The edge brought by increased skill, however, was swamped by the effects of industry growth, which depressed returns across the board.

There are now more than 7,500 mutual funds, according to the Investment Company Institute. That’s 14 times more than there were in 1979. With so many more managers competing to deliver market-beating results, the study found, average returns are now 0.5 points per month lower than they’d be if competition hadn’t increased.

It used to be chummier and less cutthroat. When Bob Bacarella, 65, started investing in stocks 30 years ago, he could phone executives — and actually speak to them — while asking for information that could get someone thrown in jail today: “Hey, how were sales last week?’”

Now companies release news to all investors at once. Data points are instantly fed through sophisticated computer models and interpreted by squadrons of analysts. Research that used to take weeks must be shortened to hours or minutes. Managers say it’s “bewildering and overwhelming,” says Jason Voss, a former fund manager who’s now a content director at the CFA Institute

If skilled managers of active funds have such trouble, why not just rely on cheaper index mutual funds or exchange-traded funds that track broad market segments? Bacarella, now co-manager of the Monetta Young Investor Fund (MYIFX), says a good manager can help protect clients in down markets by limiting a fund’s risk exposure.

If fund managers’ jobs have been reduced to minimizing losses, that’s one more thing for them to worry about.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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