I recently finished reading Louis Lowenstein’s latest critique of the mutual fund industry, The Investor’s Dilemma: How Mutual Funds are Betraying your Trust and What to do About it.  The book is a great read for investors seeking an inside look at the fund business, blemishes and all.

Lowenstein is particularly critical of the industry’s imperative of putting marketing and asset gathering before the best interests of investors, not to mention the proliferation of new, often complex products.

I highlighted a few gems from the book that stuck with me:

  • On the growing product shelf: “In 1970, there were 300-odd mutual funds for both stocks and bonds; there are now 4,800 equity funds alone.  But instead of providing guidance and stewardship, the fund companies are exploiting the public’s lack of patience and sophistication, recklessly breeding new variants of funds to (they hope) attract investors chasing whatever is the flavor of the day.”
  • On the growing complexity of building a portfolio: “The term ‘stand-alone’ was an artfully crafted reference to the days, now past, when the goal of a fund was simply to make money and to outperform the market as a whole.  Two or three funds were commonly thought to be the right number (perhaps a couple of stock funds, plus a bond fund); taken together, they would provide all the diversification one needed.”
  • On asset allocation and diversification: “All things being equal, it makes sense to invest with generalists, managers who will try to capture good values anywhere they can find them, here and abroad, in small-cap or large-cap stocks, distressed debt or spin-offs.  Since no one sector will offer good value at all times, a sector fund (such as an energy fund) has dumped back on you, the investor, the responsibility for knowing when to get in and when to get out.  The asset allocation strategies built around those style or sector funds imply that an investor needs a lot of funds in order to be adequately diversified.  That’s just plain wrong...”

In these troubling markets where investors are arguably the most susceptible to exploitation, I thought it would be interesting to apply Lowenstein’s above views to several new products that recently came across my desk.  Consider the Mackenzie Universal Africa and Middle East Fund and the Franklin MENA (Middle East and North Africa) Fund.  Do these products represent solid long-term investment solutions or a reckless attempt to gather assets?

The Bank of Montreal (BMO) and Guardian Group of Funds (GGOF) also recently announced that they are expanding their product line-up under a new brand name, the BMO Guardian Funds, with over 25 options to choose from.  Among the new funds are the BMO Guardian Sustainable Climate Fund and the BMO Guardian Sustainable Opportunities Fund.  Do all these (overlapping) options make it any easier for investors or advisors to build a portfolio?

Then there’s the new iShares Portfolio Builder Funds, offered by Barclays Global Investors (BGI).  These four funds are baskets of ETFs that are monitored by BGI and rebalanced to specific allocation parameters.  Let’s take a closer look at the iShares Growth Core Portfolio Builder Fund.  The fund’s objective is to ‘identify and optimally diversify certain fundamental sources of return through a proprietary multi-factor selection process.’  It holds 21 ETFs in varying proportions to achieve this objective.  Do investors really need 21 funds and a multi-factor selection process to be adequately diversified? 

There’s sure to be more funds launched in the coming months as fund companies attempt to recapture assets lost to redemptions and steep market declines.  Investors are well advised to be skeptical before taking the bait.  For those who have the knowledge and interest in investing in specialized new products, the first place to go looking may be last year’s latest and greatest offerings.  The energy, mining, emerging markets, China and agriculture funds have been deeply discounted.