Mutual Funds Are Sucking Wind

By on September 7, 2011

JPMorgan Chase revealed data showing a significant percentage of mutual funds are substantially behind their benchmarks.  It’s the worst performance relative to the indexes since 1998.

JPM looked at 2,806 funds and found that 47 percent are trailing their benchmarks by more than 2.5 percentage points.

Tom Lee, JPMorgan’s chief U.S. equity strategist, attributes the poor performance to the extreme volatility experienced this summer.  The underperformance has accelerated since the beginning of July.

Lee thinks the lagging results by the pros may result in a year-end rally as these managers shift to higher beta equities.  He wrote, “When active managers trail, there is a tendency for markets to rise into” the end of the year. “Intuitively, when there are more trailing, there will be logically an attempt to outperform, which should be driven by risk-taking.”

SMA Comment: Alan Abelson, in his latest “Up and Down Wall Street” column at Barrons, cited data from Alan Newman, editor of CrossCurrents, showing mutual fund cash levels at an all-time low level of 3.3%.  This may make Lee’s anticipated rally a challenge, especially with investor redemptions picking up due to historically high volatility.

Source: Bloomberg

One Comment

  1. Jonas Friedlander

    September 7, 2011 at 2:15 pm

    Mutual funds are a dying investment product from the dark ages. The managers are running a racket that has survived for years, despite evidence of excessive costs and miserable performance.

    MFs will eventually fade away as the investing public grows more educated about the process and what they’re sacrificing by throwing their hard-earned money at some highly educated salesman (whose performance is highly correlated with chance minus costs).

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