$326 Million in Need of a New Home
The high cost of blind loyalty
By Paul Price
Sticking by your friends through thick and thin is an admirable trait. Staying put in chronically poor-performing mutual funds, though, can be extraordinarily costly.
Every fund manager intends to add value while collecting their pay in the form of management fees. Sometimes, though, facts show that their decisions have actually subtracted from returns over long periods of time.
Investment styles (value versus growth, small-cap versus large-cap, etc.) tend to rotate in and out of favor. Knowing that everyone underperforms some of the time, the question becomes…
How long should investors wait before pulling the plug on a demonstrably bad mutual fund?
Muhlenkamp Fund’s (MUHLX) founder and portfolio manager Ron Muhlenkamp is a highly educated, well-meaning man. His fund’s tag line is, “Intelligent Investment Management.” The question mark shown below was added by me.
Muhlenkamp hired family members to fill key positions on the fund’s executive staff. That is equivalent to stocking a corporate board of directors with people that are unlikely to be objective towards any of their CEO’s policies or proposals.
Nepotism suggests that positions at MUHLX were not filled based on who were the “most qualified” applicants.
Nobody would worry about that if MUHLX had posted decent returns. A glance at the fund’s own figures, though, spells out the damage inflicted on shareholders in the decade ended Dec. 31, 2015.
That period was pretty representative as it spanned the manic housing bubble years, those of the Great Recession (2008 to 2009) and America’s subsequent gradual recovery.
In those same 10 years, $10,000 invested in the S&P 500, with dividends reinvested, would have more than doubled to $20,242, for a cumulative net profit of $10,242. That represents a good, but not great, 7.31% annualized rate of return.
Continuous holders of MUHLX would have netted 10-year cumulative total gains of just $639.Ouch. That was a meager 0.62% per year compounded. Having $10,000 in MUHLX, rather than owning the index, cost $9,603 in foregone profit. Those with $100,000 stakes missed out on $96,030. Million dollar investors in MUHLX lost $960,300 versus index buyers.
For MUHLX, 2015 was a disaster relative to the market. It lost 6.21% while the broad market return was slightly positive. Over the three years ended last December, continuous shareholders captured just 54.6% of the S&P 500’s gains. The five most recent years fared even worse, at only 50.4% of the index’s return.
