I have been a long term believer in your philosophy of buying the bank instead of putting your money into a bank account. For me, that saying pretty much applies to all financial services. Commercial & retail banks, mortgage lenders, insurance companies, mutual fund companies and investment banks have all made out better than their clients. In the back of my mind, holding onto their shares makes using their services less painful, as my service charges have been contributing mightily to my investment returns of late!

Sure we can find out which ones have done well in the past but which ones will do well in the future?

Seems like most of the issues have the same root: people looking for shortcuts in investing decisions, rather than doing the hard work of the research to identify a good manager or a good stock other people have missed.

I realize that many people may lack the knowledge to do the research, but that’s why they should all read this site.

The trick is finding a well managed mutual fund before it produces excellent results. Most investors tend to just buy a four or five star mutual fund.

I am not sure that microcap stocks are a core asset class.

Actually, 67% of assets were held in taxable accounts in 2002 in the US.

I know from personal experience that beating the markets is very hard. Most investors do not have the time to research stocks to invest in.

I have some questions about points 1-3.

Shouldn’t the objective be to find the few well managed actively managed funds (that do beat the indexes)?

If you want to invest in a class of stocks that aren’t in an index (microcaps, for example) what do you do? a total market index will overweight you large caps (especially if you already have an S&P fund).

If you hold your funds in a tax advantaged vehicle, like a 401(k), IRA or annuity in the US, or an RRSP in Canada, which is where most people hold them, what difference does it make how tax efficient a fund is?

Finally, why not simply focus on a few good stocks rather than owning lots of average ones?

Whether an actively managed fund is really a closet index fund is immaterial because I’ve never seen a prospectus or ad that says “If you dig deeper , our fund actually tracks the index and hmmm… we charge 2.5%”. Most mutual fund investors cannot tell if their holding is really an index hugger.

Dave, fees are only one of the reasons for underperformace. David Swensen says in Unconventional Success that other reasons include “poor security selection”, “costs associated with mindless trading” etc.

This is actually very misleading. Most of these studies classified “actively managed funds” very loosely. About 3/4 of “actively managed funds” are really closet index funds. It doesn’t prove that passive beats active. All they tell you is that closet index funds with high MERs can’t beat index funds with low MERs over the long term. Duh!! Avoiding closet index funds is a given. I just find that all these active vs passive studies/statistics don’t add any insights. You did qualify that some funds are worth investing.

I think there are a few fund managers who are worth investing with. The vast majority of funds are just not worth owning.

Personally, except for a venture capital fund that I am locked in, most of my holdings are in index funds, ETFs, dividend equities and value stocks.