A relatively recent development has taken place in the mutual fund industry. Salesmanship has taken a silent chokehold. There has been an increasing emphasis on marketing rather than management efficiency and results. The industry has replaced performance with publicity in an attempt to increase revenues from fees without engaging in sensible investment policies.
It is easy to see why this has been happening. Attracting investor capital by achieving great returns over a long period of time is difficult to do. Conversely, marketing a quirky aspect of the fund or highlighting one year where it outperformed is much easier. It is also very effective at convincing investors to hand over their cash. This marketing, however, is paid for by the investor through 12b-1 fees charged by mutual fund managers1.
Because of poorly laid out incentive structures, mutual fund managers opt to prioritize assets under management rather than a sustained history of good performance. Since the fees these managers rake in are directly tied to how much of investor’s money they manage, it only makes sense that they would prioritize this above all else. This is a clear conflict of interest, and it siphons away vast sums of money away from unknowing investors who pay 12b-1 fees.
They are consequently incentivized not to work towards performing well across time, but instead to advertise any brief outperformances and minimizing the publicity of a year in which they underperformed. This takes advantage of investor’s psychological tendencies and only serves to enrichen the managers with no benefit to the investor.
Ultimately, the investors are the ones getting screwed over. Managers use their investor’s capital to advertise their sudden, lucky years and so investors hop in thinking it will continue, only to be disappointed when they realize they’ve been misled. When the primary source of publicity for a fund is financed using investor’s money through fees instead of organically through good performance and strong investment philosophy, investors should question whether they should bother with that fund at all.
Can you provide some examples of funds doing this? Hasn’t this largely become a messaging and public perception game since average performance is the norm?