Sticking up for the small investor
A champion of small cap stocks, this U.S. advisory joins forces with a Wall Street columnist to defend small investors squeezed by big fees.
The leading character in this story, the small investor, is dubbed Mr. Joe Six-Pack.
This implies that he is a) an avid consumer of beer, and b) a man. There are countless investors who do not fit either category, of course, but our tale is not about beverages or gender.
It’s about defending the average investor.
Mr. Max Bowser, one of America’s leading champions of small cap stocks, also champions the average Americans who invest in them.
We are, he says, “swimming around in the backwaters of the investment pool.” Plenty of people in the investment industry will wade into that backwater to extract money from Joe (or Josephine), he adds, but many fail to deliver full value for the money they pocket.
Mr. Bowser, who lives in Virginia, has an ally in New York at the Wall Street Journal. Mr. Jason Zweig recently took a swipe at the way mutual funds behave with other people’s money.
In the latest issue of The Bowser Report, the editor quotes liberally from Mr. Zweig’s column in order to make his point that a solid small cap stock is preferable to a money-guzzling mutual fund.
Reaching for the dough
When Mr. Six Pack has some extra money, writes Mr. Bowser, he has many choices — real estate, bonds, stocks and so forth.
He will have no shortage of people telling him how to spend it. “There are many hands reaching out for his dough.” Most of those hands are attached to people who will try and steer Joe away from penny stocks.
More than a few of those hands stretch out from the mutual fund industry. And they have plenty of support — “the financial press is in love with funds,” the editor adds disapprovingly.
But not Mr. Zweig. Recently his “Intelligent Investor” column carried the heading, “Stop Putting the Squeeze on Investors.” The squeezers in question are America’s big fund companies.
Only in their dreams
Despite a long run of uncertainty in the markets, fund company profits are eye-popping, Mr. Zweig points out.
“The 10 major publicly-traded fund management companies had a combined $21 billion in revenue last year. Their net margins — the percentage of every dollar they take in that turns into pure profit — still are running at up to 25.5%, a rate most businesses could reach only in their dreams.”
Yet the companies don’t feel compelled to pass any of this manna along to investors in the form of more attractive fees.
That is precisely what Mr. Zweig urges fund companies to do. Cut fees.
“When returns shrivel, high fees hurt so badly that just about every investor feels the pinch.”
There is also the matter of taxes. (The tax structure differs between Canada and the U.S., of course, but distributions can bite investors in both countries).
“Much of the money management industry still invests as if taxes were irrelevant to net returns,” says Mr. Zweig. They should walk around in their investors’ shoes.
If fund managers and financial planners were to invest alongside their clients, he adds, “they would feel the same pain of paying unnecessary taxes — and quickly learn the importance of minimizing those liabilities.”
But the focus remains on fees, no matter what.
Acting like sheep
The writer cites a study from Toronto’s International Centre of Pension Management. It found that “even among the pension funds with access to the world’s best money managers, the smallest accounts earn the biggest returns.” In short, bigger is rarely better.
“Yet very few investment firms close funds (or stop taking new money) when they are in danger of growing too large to be effective. Closing would reduce the rate at which their management fees can rise. But when performance suffers and investors’ enthusiasm fades, fees fall anyway.”
The other problem, Mr. Zweig contends, is that most funds charge high fees simply for copying each other. The market can’t function at its best, he says, “when tens of thousands of professionals managing trillions of dollars act like sheep — locked into simultaneously pursuing whatever happens to be going up in price and fleeing whatever is falling.”
You should hold the people who manage your money accountable, says the columnist. Investors should be willing to put the pros on the spot with two questions.
“At year end, ask your broker or financial adviser to report not only how your portfolio actually did, but how it would have done if he had left it at a standstill, making no changes for the entire year.”
There’s an even simpler query. “Perhaps the most important question investors should ask any financial professional is, ‘How do you invest your own money’?”
If the answer is “Not like Joe Six-Pack,” maybe it’s time for a change.
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