Where are the fund shareholders' yachts?

They have more to cheer about than those who own the funds themselves

May 28, 2013 @ 12:01 am

By Jason Kephart

Shareholders of mutual fund companies have had a lot to be happy about so far this year — much more, in fact, than the shareholders in the mutual funds themselves.

Publicly traded shares of mutual fund companies soared more than 62% for the 12-month period ended May 20, more than double the S&P 500's 31% return, according to Morningstar Inc.

The stocks, which include BlackRock Inc., Franklin Resources Inc., T. Rowe Price Group Inc. and WisdomTree Investments Inc., have been lifted by the stock market rally and the deluge of money coming off the sidelines and into investment products.

“The most obvious answer [for the outperformance] is the surge in the stock market. That's led to higher fees,” said Eric Berg, a life insurance and asset management analyst at RBC Capital Markets.

The S&P 500 has been on a tear since fall 2011, gaining more than 47% since then. This year alone, it is up about 17%.

In addition to the market rally, investors helped fill mutual fund company coffers by pouring a record amount of money into funds in the first quarter as cash came flying in from the sidelines.

Mutual and exchange-traded funds had more than $290 billion in net inflows during the first four months of this year, up about 50% year-over-year, according to research firm Strategic Insight.

That has helped push margins at the companies higher, Mr. Berg said.

“You can add assets without adding costs,” he said. “Margins start improving, and that's really it.”

The irony is that the investors buying mutual funds and ETFs from the companies haven't had nearly as robust performance.

At BlackRock, which was up about 70% for the 12-month period ended May 21, the average equity fund returned 28%, according to Lipper Inc.

Results are similar throughout the industry.

The average equity fund at Franklin Templeton Investments is up 27%, while the stock is up 59%. Shares of Invesco Ltd. is up 63%, though its average equity fund is up 31%.

Even Janus Capital Group Inc., which has had close to a 4% return year-to-date, has outperformed its average equity fund return 30% to 28% over 12 months.

What it comes down to is that many of the company's chief executives have proven that they are much better at running a mutual fund firm than their portfolio managers are at picking stocks, Mr. Berg said.

“The business itself is not necessarily the same thing as the funds,” he said. “You can have a successful business without fund performance.”

Last year was the 10th of the past 12 where the majority of mutual fund managers underperformed their respective benchmark, Mr. Berg said.

One alternative for financial advisers who want their returns to look more like their fund company's, is The Vanguard Group Inc.

Vanguard founder John Bogle set up the firm so that its fund shareholders are the owners of the company. That is why Vanguard's products are offered to investors at cost.

Mr. Bogle has long argued that “no man can serve two masters” when it comes to the interests of shareholders in mutual funds and shareholders in a mutual fund company because they aren't always aligned.

“Business has an obvious reason for existence — to earn a profit, and that's a profit for the management company,” Mr. Bogle recently told PBS Frontline.

“It doesn't take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get, because they're both based on gathering assets and raising fees,” he said.


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