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. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
  2. Why is it that when investors realize returns on a mutual fund, its price tends to ...

    Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market ... Read Answer >>
  3. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ... Read Answer >>
  4. How liquid are Vanguard mutual funds?

    Learn how liquidity applies to the Vanguard mutual fund family. Vanguard is one of the most well-known and largest investment ... Read Answer >>
  5. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
  6. Can I sell mutual fund shares below their minimum intial purchase amount without ...

    Yes. You can freely buy and sell shares of a mutual fund regardless of any requirement for a minimal initial purchase amount ... Read Answer >>
Related Articles
  1. Investing

    Sorting Out Cult Stocks

    Is that crazy product going to be the next big thing? Learn how to evaluate these companies here.
  2. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  3. Investing

    Mutual Funds: Does Size Really Matter?

    The growth of mutual funds isn't always cause for celebration. Read on to find out why.
  4. Financial Advisor

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  5. Investing

    When To Buy A Mutual Fund

    There is money to be made in mutual funds, but investors fall into several pitfalls that keep them from maximizing their profits. Read these tips to take the uncertainty out of investing in mutual ...
  6. Investing

    Mutual Funds Are Awesome - Except When They're Not

    This investment is very popular, but that doesn't mean it comes without risk.
  7. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  8. Investing

    Has Your Fund Manager Been Through A Bear Market?

    How to find a portfolio that will survive when the bulls stop charging.
  9. Financial Advisor

    5 Secrets You Didn’t Know About Mutual Funds

    Learn five of the "secrets" about mutual funds that can have a significant impact on mutual fund choices and investor profitability.
  10. Financial Advisor

    This Is How Much Mutual Fund Managers Make

    Learn about the high-paying salaries of mutual fund managers and the low level of transparency in income reporting by mutual fund companies.
RELATED TERMS
  1. Cult Stock

    A classification describing stocks that have a sizable investor ...
  2. Fund Supermarkets

    An investment firm or brokerage that offers investors a wide ...
  3. Fair Weather Fund

    A type of mutual fund that has a tendency to perform well during ...
  4. Run On The Fund

    A situation in which a hedge fund faces an increasing amount ...
  5. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
  6. Total Annual Fund Operating Expenses

    For a mutual fund or other type of fund management structure, ...
Hot Definitions
  1. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  2. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  3. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  4. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
  5. Dark Pool

    A dark pool is a private financial forum or exchange for trading securities.
  6. Quadruple Witching

    The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock ...
Trading Center