Wolf in sheeps clothing

Many so-called active fund managers and stock pickers are really "closet indexers."

Let's take a look at some mutual fund shenanigans...

Many of the top performing mutual funds are small as measured by assets under management. In their small stage, funds take large positions in just a few stocks, seeking exaggerated performance from the volatility that results from lack of diversification.

If the volatility brings exaggerated downside performance, the mutual fund company will close the fund (merge it into a larger fund). If the volatility brings exaggerated upside performance, the mutual fund company will publicize it heavily, attracting new funds.

As the successful fund's assets under management reach critical mass, the fund begins to diversify to mimic the performance of their benchmark index. Their goals change from attracting new assets to retaining existing assets (as long as they have close to benchmark performance, withdrawals will be limited)-closet indexing.

What's the problem with closet indexing? It costs you money!

Since actively managed funds, on average, charge almost 5 times what an comparable index fund charges in fees (1.15% versus 0.25%), on a $400,000 portfolio, the difference is $3,600 each year. Over 10 years (assuming you could have gotten 10% on that money) closet indexing can cost you $57,375 in added fees.

Visible Investing enables you to see the outcome of your investment decisions BEFORE you make them. We conduct seminars that help employees manage their 401(k)'s, develop independent investing solutions, and manage client assets. Contact us to discuss your personal situation.