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Mutual fund families

By David Luhman on Sat, 05/09/2009 - 23:54

Mutual fund families

How I'd run a fund company

If I were running a mutual fund company, I'd set up as many different funds as possible. I'd set up a fund that invests solely in sporting goods, and others for computers, biotechnology, and banks. I'd also set up funds that use complicated computer analysis and funds for value and growth investing.

And I wouldn't stop there. I'd try to set up so many funds that no matter what, in all kinds of economic scenarios, I'd always have a fund that would be at the top of the performance rankings.

Of course, I'd also have a lot of dogs at the bottom of the list, but nobody headlines the cellar dwellers. Plus, by using this strategy I always can say legitimately that I have the number one fund in my advertising, and this will provide a constant flow of new customers into my fund family. Of course I won't advertise that I have a lot of bottom feeders as well.

This strategy probably will attract a lot of attention and new customers for me. It may not be the best strategy for my customers, but hey, didn't I disclose to them that investing in mutual funds involves risks?

Advantages of Fidelity Investments

Although I just hypothetically described how I'd run a mutual fund company, this is a pretty accurate description of how America's largest, most profitable fund company already is run.

No tape about mutual funds would be complete without mentioning Fidelity Investments. Fidelity is by far America's largest mutual fund organization. Fidelity's history goes back to the 1930s, and Fidelity currently manages over $400 billion dollars in over 200 funds.

By most accounts, Fidelity offers three things : good performance, broad selection, and good customer service.

With help from its mammoth Magellan fund, Fidelity's stock funds have historically outperformed the market, although by just a hair. If you're looking for the rewards that may come with aggressive trading and investing, Fidelity is a good place to look for it.

Fidelity is also the place to look for a broad selection of funds. If you want to speculate on certain industry sectors, look to Fidelity. Fidelity offers so-called "select" funds which invest only in certain industries like technology or pharmaceuticals.

Because of the focus on one industry, these "select" funds are often at the top or bottom of the performance heap. If you like grabbing nickels from in front of a steamroller, this is your ticket.

Fidelity also offers a discount brokerage where you can invest in individual stocks or even mutual funds offered by other companies. Finally Fidelity has good service with 24 hour telephone service and scores of walk-in branches around the country.

Disadvantages of Fidelity

Still, with all Fidelity has to offer, I have trouble giving it a ringing endorsement. Fidelity, to me it seems, is more interested in selling its mutual funds and making money than with prudently managing people's assets.

Because of his stake in the privately held company that runs Fidelity funds, Ned Johnson has become a multibillionaire and one of America's richest people. Fidelity has also sought to further its influence in the financial world by publishing Worth magazine.

Fidelity has a number of fairly risky funds, and fund managers are encouraged to do almost anything to produce high returns. Most of the Fidelity general purpose funds are given wide latitude in their investments. This wide latitude sometimes allows the fund to spice up its return, but it can lead to trouble.

Fidelity has load and no-load funds

Fidelity also has a confusing array of load and no-load funds. Not surprisingly, the more popular and successful funds have loads. To its credit, though, most funds purchased through retirement accounts don't have loads.

Fidelity also has a special breed of funds called the Fidelity Advisor Funds. These funds are marketed by brokers and other salespeople, and carry a load of about 4 percent.

Although Fidelity has a good record in domestic stock picking, it has a lackluster reputation in bonds and international equities. However, Fidelity's largest domestic stock funds recently have underperformed market averages.

So although I can't give a ringing endorsement of America's largest fund family, you could do a lot worse than Fidelity. Overall its loads are low, and the ongoing management fees are reasonable. If you like risk and the rewards that may come with it, consider Fidelity for some of your equity investments.

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