Thomas G. Donlan in Barron's has been my favorite editorial writer for several years. I've never linked to him before because his editorials usually deal with political issues, which are irrelevant to this blog.
Or at least not directly related.
Anyway, his latest editorial (scroll down) touches on something relevant to my previous post about money managers. Specifically about many of them managing portfolios with billions of dollars in assets. And it reminds us that too many mutual fund families are marketing operations first.
Donlan writes:
Investors will crowd into
successful mutual funds until they aren't successful anymore, indeed
until all the success has been converted into management fees. Johnsen asks us to imagine ourselves to be
shareholders of a mutual fund of 100 shares, with a net asset value of
$101 and a 1% management fee. If we shareholders expect that there will
be no excess market return, we might pay the fee just for the manager
to do paperwork and be satisfied. But if the manager can increase the
value of the fund by $10 more than the market return, the fee schedule
says we will pay 1% of $111, or $1.11, and the net asset value of each
share will be $1.0989. Not so fast: We win only if the fund is closed to
new investors. If our skilled fund manager is widely expected to beat
the market by 10%, many investors will buy shares at the beginning of
the period for $1. This is one reason why folks like Mason Hawkins and Staley Cates and the guys at Tweedy Browne are worthy of respect. In addition to being excellent investors with top-notch long-term records, they will close their funds to new investors when conditions warrant. These people have significant portions of their personal net worth invested alongside their shareholders. So their interests are aligned with their funds' investors.
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