What is the performance cult?

By Andrew Beattie AAA
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. What are the advantages of an index fund over an ETF?

    Diversifying a portfolio is one of pillars of investing basics, and an index fund can provide an investor with exposure to ...
  2. Why should a growth investor consider the metals and mining sector?

    Examine facts and trends about the metals and mining sector and the world economy that make metals and mining stocks attractive ...
  3. Which are the most popular mutual funds that target the financial services sector?

    Discover some of the most popular and highest rated mutual funds offered that hold stock portfolios in the financial services ...
  4. Why would a value investor be drawn to the financial services sector?

    Understand the nature of businesses in the financial services sector, and learn why they are appealing investments for value ...
RELATED TERMS
  1. Historic Pricing

    A method for calculating the value of an asset using the last ...
  2. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  3. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann ...
  4. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...
  5. Product Portfolio

    Investopedia explains: A Product Portfolio is the collection ...
  6. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    The Impact of the Janus Market Timing ...

  2. Mutual Funds & ETFs

    PIMCO vs. BlackRock: Weighing Mega Fund ...

  3. Professionals

    Are Alternative Mutual Funds, ETFs Right ...

  4. Investing

    Are These 2015's Most-Promising Small-Cap ...

  5. Stock Analysis

    Why This Bond Fund Should Be in Your ...

Trading Center