The World of Large Mutual Funds

The World of Large Mutual Funds            

We can all go down together, but I can’t let them go up without me.

Justin Mamis

The manager of a large mutual fund had to report to his boss about his fund’s performance over the last quarter. His fund was down 3 percent over that time frame while the SP500 was up 10 percent. The fund’s mandate was mid to large cap growth with value. They both worked for a large institutional bank (so you know where this is going). The fund manager’s boss asked him what the hell he was doing. Both of their bonuses were hanging in jeopardy. The manager explained he was trying to position the fund into a lot of under followed names that had a good chance to increase in value over the next 2 to 3 years. “Christ”, his boss said, just put the money where everybody else is putting their money. That way we will stay near the index and won’t be noticed. The fund manager said he was trying to make money for the unit holders over the long term. The boss told him “we’re not here to make money for other people we’re here to increase our assets under management so we can make more money for ourselves. It’s important we make our quarterly numbers.” He went on. “We do this by blending into the crowd so we can keep our jobs and collect our bonuses.”

“But I just read this blog on the internet about something called Wager Value”. The boss blew his top. “Wager Value, what the hell is that?”  Maybe I should send you down to inhuman resources for a re-orientation. The fund manager finally agreed to do what the boss wanted. As he left he noticed several other mutual fund managers hiding behind the drapes in his bosses’ office, trying not to be noticed, meanwhile his boss was thumbing through a dictionary trying to look up Wager Value.

Okay, maybe I’m being unfair here. I didn’t mention any of the various investment committees that the fund manager would have to pass his stock ideas through. But it all leads back to the same thing, closet index hugging. Something to keep in mind next time you have to pay your management fees for a fund that is just trying to match the market over the longer term, minus fees of course. Small wonder the herd effect is alive and well in the stock market.