The late economist and Nobel Laureate Paul Samuelson said this in 1967 about mutual funds: "There was only one place to make money in the mutual fund business - as there is only one place for a temperate man in a saloon - behind the bar and not in front ... so I invested in a management company." Not much has changed in 43 years. Investors will always be better served buying the stocks of asset management companies than the mutual funds these companies manage. To illustrate my point, I'll examine the share repurchase activities of management companies in fiscal 2006, comparing these hypothetical returns to the end of 2009 with the returns of one of their large domestic equity funds. The results are hardly surprising. (This popular investment vehicle has seen its share of ups and downs, successes and scandals. Read all about it! A Brief History Of The Mutual Fund.)

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Five Top Mutual Fund Companies

Company Market Cap Return To Date
2006 Share Repurchases
BlackRock (NYSE:BLK) $28.0B 75.1%
T. Rowe Price Group (Nasdaq:TROW) $13.0B 40.2%
Franklin Resources (NYSE:BEN) $22.8B 20.7%
Eaton Vance (NYSE:EV) $3.5B 9.7%
Federated Investors (NYSE:FII) $2.5B (18.9%)

80% Success Rate
Using an average of the S&P 500 at both the beginning and end of 2006, you get 1333.30. It closed 2009 at 1115.60, meaning the index lost approximately 16.3% over the last three years on a cumulative basis compared to positive returns for four out of five fund companies. Only Federated messed up their share repurchases. At the end of the day, the funds did much worse over the same three-year period. The results are in the table below.

Five Top Mutual Funds

Fund Assets Cumulative Return 2007-2009
BlackRock Equity Dividend A (MDDVX) $7.0B 3.6%
T. Rowe Price Capital Appreciation (PRWCX) $9.3B 10.5%
Templeton Growth A (TEPLX) $19.1B (10.5%)
Eaton Vance Large-Cap Growth A (EALCX) $147.0B 10.6%
Federated Capital Appreciation A (FEDEX) $1.5B (4.3%)

The Index Loses
All five of the funds, however, did better than the S&P 500 between 2007 and 2009. Using my method for calculating the cumulative return for the index, they did so by a significant margin. For instance, the Eaton Vance Large-Cap Growth fund (the top performer of the five) beat the index by 26.9%. Given its small size, it makes sense that it would do the best. After all, the larger a fund gets, the harder it is to outperform the index, because the fund will often begin to track the index rather than engage in stock picking. Interestingly, the Eaton Vance fund did better than management did buying back stock. This is one situation where fund investors actually made out better than shareholders. As you can see by the two tables, it doesn't usually happen.

Bottom Line
Mutual fund companies, as Paul Samuelson pointed out over 40 years ago, are in the business of marketing products, not managing money. They no longer have your best interests at heart (not that they ever did) but those of their shareholders. If you want to invest in mutual funds, be my guest. However, the evidence suggests you're better served investing in the companies themselves. That's where the real money is. (Forget the sock drawer - learn how to earn big bucks over the short term. Check out Money Market Mutual Funds: A Better Savings Account.)

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