Monday, April 13, 2015

Some Things Never Change: Bank-Sponsored Mutual Funds

Some Things Never Change:  Bank-Sponsored Mutual Funds

For one shining moment in 1995, I sat atop a collection of bank-sponsored mutual funds that were solidly ahead of their respective benchmarks.  Hugh McColl, Chairman of NationsBank, responded by drawing a happy face on the memo reporting the achievement of my portfolio managers.   It was a great moment, because our funds were burdened with above average fees, and bank-sponsored mutual funds were known for their poor performance.

Nathaniel Popper reports in today’s New York Times that bank mutual funds are still laggards.[1]  Broadly speaking, bank-sponsored funds have ranked last among mutual fund purveyors for decades.  Brokers, discount brokers, and direct sellers have all beaten the banks.  For the most part, it comes down to one factor: fees.  Banks charge more.  In order to cover the costs of financial advisors, bank infrastructure, and marketing, banks tend to wind up with the highest fees in the mutual fund industry.   On the rare occasion when banks offer index funds, those products tend to carry much higher fees than a comparable product offered by Vanguard or Blackrock. 

All in all, bank mutual funds are a losing proposition for clients.  As Mr. Popper reports, banks continue to be attracted to the business because it offers them a stable source of income.  They’re able to entice clients through their brands (think Goldman Sachs, JP Morgan, Morgan Stanley, Wells Fargo).  However, on average they deliver poorer results than the rest of the mutual fund industry.

Interestingly, banks like to use the weighted average of their mutual funds’ performance in accessing how their overall fund complexes are doing.  In other words, they want to give more weight to the funds with the most assets in comparing their results to Vanguard, Fidelity, T. Rowe Price, etc.  While this method makes them look more competitive, it is biased because stronger performing mutual funds usually attract client cash flows, and weak funds lose them.  The banks are like body builders with glaring weaknesses.  They’re trying to strike a pose that hides their deficiencies.    

Throughout the history of the mutual fund industry, banks have also been the least successful at retaining investment talent.  Fifty years ago, much of the money management talent resided in banks.  However, independent money managers and mutual fund complexes soon began draining talent from the banks.  During my tenure at Nationsbank, I fought a losing battle in trying to get the bank to properly compensate portfolio managers.  While our mutual funds were expensive, those fees weren’t flowing to people trying to generate performance.

When it comes to banks and mutual funds, plus ça change, plus c'est la même chose.

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