A:

In the late '60s and early '70s, the bull market and media scrutiny of fund managers had made heroes of the so-called gunslingers of the go-go funds. Some of these managers were pulling off yearly returns of 60%. Investors would follow managers based on performance, moving their money from fund to fund to chase the hottest hands, leading to the name "the performance cult". This was encouraged by a large sales push by mutual funds, making the shares of funds much more liquid. The gunslingers were increasingly encouraged by the seemingly endless bull market to expand their buying into riskier areas, including small, illiquid stocks, to maximize returns. They also urged portfolios to cash in on any capital gains that would add to their total. If they didn't, they would be hit by a large number of redemptions as investors in the performance cult left the fund for a more aggressive manager.

Not everyone was caught up in the go-go funds, however. Paul Cabot, a pioneering mutual fund manager who made his name by speaking out against the excesses before the 1929 crash, warned that the focus on short-term performance was both wrong and dangerous. The gunslingers were pushing up already overvalued stocks by moving their fund's capital in for the momentum play, and looking less and less at the fundamentals. This overheated the market and added to the severity of the correction that came with stagflation in the mid '70s.

The go-go funds were the hardest hit by the turnaround in the bull market. The outsized returns of the gunslingers and their performance cult were going, going, gone. These funds were officially renamed "aggressive growth funds", but they could not stem the redemptions that continued for the next decade. Today the performance cult still exists, but there is comparatively less fund switching because the fees incurred from jumping fund to fund eat up modest differences in performance.

For further reading on mutual funds, see Picking The Right Mutual Fund, The Truth Behind Mutual Fund Returns and our Mutual Fund Basics tutorial.

The question was answered by Andrew Beattie

RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  3. Do mutual funds require a demat account?

    A dematerialized account enables electronic transfer of funds. The account is used so an investor does not need to hold the ... Read Full Answer >>
  4. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  5. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  6. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    The 4 Best T. Rowe Price Funds for Growth Investors in 2016 (TROW)

    Discover the four best mutual funds administered and managed by T. Rowe Price that specialize in investing in stocks of growth companies.
  2. Mutual Funds & ETFs

    The 3 Best T. Rowe Price Funds for Value Investors in 2016

    Read analyses of the top three T. Rowe Price value funds open to new investors, and learn about their investment objectives and historical performances.
  3. Mutual Funds & ETFs

    Top 3 Lazard Funds for Retirement Diversification in 2016

    Learn about Lazard Asset Management, its long history of strong performance and the top three Lazard funds to consider for retirement diversification.
  4. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  5. Investing Basics

    How liquid are Fidelity mutual funds?

    Review the liquidity features of mutual fund shares and an overview of Fidelity mutual funds. Most investors look for convenient access to their investments.
  6. Mutual Funds & ETFs

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  7. Mutual Funds & ETFs

    Top 5 Wellington Funds for Retirement Diversification in 2016

    Discover the top five Wellington Management funds for retirement diversification in 2016, with a summary and performance details of each fund.
  8. Mutual Funds & ETFs

    3 Morgan Stanley Funds Rated 5 Stars by Morningstar

    Discover the three best mutual funds administered and managed by Morgan Stanley that received five-star overall ratings from Morningstar.
  9. Mutual Funds & ETFs

    Top 3 Voya Funds for Retirement Diversification in 2016

    Learn about Voya Investment Management's mutual fund offerings and the three Voya funds to consider for retirement diversification in 2016.
  10. Investing Basics

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
RELATED TERMS
  1. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  2. Consumer Staples

    Essential products such as food, beverages, tobacco and household ...
  3. Benchmark

    A standard against which the performance of a security, mutual ...
  4. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  5. Equity

    Equity is the value of an asset less the value of all liabilities ...
  6. Series 6

    A securities license entitling the holder to register as a limited ...
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center