Maybe mutual fund companies are right: The best thing you can do as an investor is put your money with them. Except rather than invest in their funds, the smartest decision over the past 25 years would have been to buy their stock.
With many fund companies reporting strong inflows of new money and rising profits, it's noticeable just how great a business model mutual fund management is for fund companies -- if not for their shareholders.
Looking back from the latest quarter to the second quarter of 1986, shares of fund companies dramatically outperformed almost all other stocks as well as their own funds.
Investors in those companies' best mutual funds didn't fare quite so well.
The top-performing fund from each company over the same period was Eaton Vance Worldwide Health Sciences Fund A (ETHSX), with a total return of about 1,500%. Franklin's Mutual Quest Fund (MQIFX) rose almost 1,300%, and T. Rowe Price Capital Appreciation Fund (PRWCX) gained close to 1,200%.
Those are impressive results, albeit from the finest funds out of hundreds that these three giants have offered over the past 24 years. By contrast, the Standard & Poor's 500 Index ($INX) rose 366.2% in the period.
Growing up, making cash
There are two main reasons for fund companies' outsize returns: the highly profitable nature of their industry and an explosion in assets delivered by a sea change in retirement saving.Fund managers essentially make money from one source: assets under management. A big part of fund companies' growth since 1986 is that rising markets raised their asset levels regardless of any organic growth. But on top of that, money has flooded in from individuals as a result of the trend away from company pensions and toward 401k plans and individual retirement accounts.
That's seen assets in the fund industry grow to $11 trillion at the end of February from $645 billion in mid-1986, according to the Investment Company Institute.
On top of these growth trends, the nature of the business has worked in fund companies' favor. If a fund's management fees are 1% of assets, for example, then an additional $1 billion into a portfolio brings an additional $10 million in revenue, excluding certain pricing discounts. But because the fund company doesn't have to hire more portfolio managers or research analysts to handle the new money, that additional revenue is quite profitable.
"The asset growth is all top-line growth," said Matt Snowling, an analyst at FBR Capital Markets who covers fund managers.
Continued: Tougher times ahead
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