Study: Investors in Broker-Sold Mutual Funds Miss Published Performance Numbers by Wide Margin, Timing Is Culprit Report is Fifth from Zero Alpha Group to Challenge Mutual Fund Status

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    WASHINGTON, Dec. 6 /PRNewswire/ -- Even though they are paying for
 brokers to assist them, investors in load-carrying mutual funds end up
 making significantly worse timing decisions than investors in no-load
 funds, underperforming their own funds' reported returns by three times as
 much as no-load fund investors, according to a major new study sponsored by
 the Zero Alpha Group (ZAG).
 
 
 
     The study finds that mutual fund investors in all three principal
 load-carrying retail share classes (A, B, and C) experience worse timing
 than investors in pure no-load funds and no-load index funds, indicating
 that investors in load funds who pay for a broker's investment advice
 actually suffer more when it comes to timing. The reported return
 performance of a mutual fund, net of expenses, is generally assumed to
 represent the performance also obtained by the shareholders in the fund.
 However, in many cases, the actual performance experienced by shareholders
 differs substantially from the performance of the funds in which they
 invest. This discrepancy arises due to the timing of investor cash flows.
 
 
 
     Entitled "Investor Timing and Fund Distribution Channels," the
 ZAG-sponsored study is co-authored by: Mercer Bullard, founder and
 president, Fund Democracy, and securities law professor, University of
 Mississippi School of Law; Geoff Friesen, assistant professor of finance,
 College of Business, University of Nebraska-Lincoln, Lincoln, NE., and
 Travis Sapp, assistant professor of finance, College of Business, Iowa
 State University, Ames, IA.
 
 
 
     The study concludes: "We find that investors who transact through
 investment professionals using conventional distribution arrangements
 experience substantially poorer timing performance than investors who
 purchase pure no-load funds. Investors in all three principal load-carrying
 retail share classes (A, B, and C) significantly underperform a
 buy-and-hold strategy. Among all load funds, Class B investors suffer from
 the poorest cash flow timing, underperforming a buy-and-hold strategy by
 2.28 percentage points annually, compared with annual underperformance of
 0.78 percentage points for investors in pure no-load funds. No-load index
 funds are the only funds found to show no evidence of poor investor
 timing."
 
 
 
     Jeff Buckner, founder and president, Plancorp, Chesterfield, MO., said:
 "This study is another major blow to non-index mutual funds. It shows that
 investors who pay brokers for mutual fund-related investment advice and
 invest in traditional broker-sold mutual fund shares experience materially
 worse performance than investors who get no such advice. The Zero Alpha
 Group-sponsored study proves that investors who buy and sell mutual funds
 through brokers using conventional distribution arrangements experience
 substantially poorer timing performance than investors who purchase pure
 no-load funds and no-load index funds."
 
 
 
     Mercer Bullard, study co-author, founder and president, Fund Democracy,
 and securities law professor, University of Mississippi School of Law,
 said: "Investors pay fees to brokers expecting to receive good financial
 advice, but mounting evidence suggests that many are worse off as a result.
 Investors' actual performance has long lagged the performance of mutual
 funds in which they invest, yet paying for advice from brokers may increase
 rather than decrease this performance gap. Perhaps brokers shouldn't always
 be expected to put you in the fund with the best investment performance,
 but at least they should get you the returns of the fund they put you in."
 
 
 
     Thomas A. Muldowney, managing director, portfolio director and
 financial advisor, Savant Capital Management, Inc., Rockford, IL., said:
 "On top of paying higher sales fees than they would with no-load index
 funds, investors in load share classes also sacrifice considerable
 performance due to bad timing. Overall, trading based on recent highs and
 lows in returns is costly to fund investors, who would do well to heed the
 advice 'buy and hold.' Investment professionals ought to be aware of the
 pitfalls of market timing and therefore less susceptible to its false
 allure. Accordingly, investors who purchase shares through such
 professionals reasonably might expect to experience less -- rather than
 more - timing underperformance than other shareholders without access to
 such professional advice through conventional distribution arrangements."
 
 
 
     Bryan Taylor, chairman and founder, Plan B Wealth Management, Perth,
 Western Australia, said: "This study reminds us that the investment selling
 industry is fundamentally flawed and cannot be considered to be truly
 advice-based. Since the inception of the personal financial advice
 industry, it has been dominated by people and institutions who have really
 had the role of selling mutual funds and stocks. The evidence in Australia
 is the same as here in the USA. Even if the consumer is sold a good mutual
 fund, the result across the board is that they do not achieve even the
 results of the fund. Assuming that people actually want to build up assets
 to supply their needs in the future, this is evidence of a system that
 consistently fails financial consumers."
 
 
 
     Key study findings include:
 
 
 
     -- Investors in actively managed funds suffer more than three times the
 annual underperformance of index fund investors; 1.70 percentage points
 versus 0.47 percentage points. Investors in no-load index funds experience
 no performance gap at all, suggesting that the smartest money is finding
 its way into these funds.
 
 
 
     -- Investors in load funds and legal no-load funds (funds with no load
 and a low 12b-1 fee) experience annual returns that lag the performance of
 the funds in which they invest by 1.82 percentage points and 1.91
 percentage points, respectively. Among all load funds, Class B investors
 suffer from the poorest cash flow timing, underperforming a buy-and-hold
 strategy by 2.28 percentage points annually. In comparison, investors in
 pure no-load funds (funds with no commission and no 12b-1 fee) experience
 an annual performance gap of 0.78 percentage points, representing an
 economically and statistically significant difference.
 
 
 
     ABOUT ZAG
 
 
 
     Founded in 1995, the Zero Alpha Group (http://www.zeroalphagroup.com)
 is an international network of independent investment advisory firms that
 manage a total of more than $7 billion in assets. The nine current members
 of the Zero Alpha Group -- including Plancorp, Savant Capital Management
 and Plan B Wealth Management -- are committed to providing objective,
 long-term private wealth management solutions to investors, focusing on
 asset allocation and a structured, quantitative approach to investing. The
 firms in the Zero Alpha Group network share a common philosophy about
 investing and client service -- a commitment to passive, tax-managed
 investment strategies while providing an independent financial planning
 solution for investors.
 
 
 
     The four previous mutual fund-related studies released by ZAG addressed
 the hidden trading costs of mutual funds (January 2004); an expanded and
 updated look at hidden mutual fund trading costs (November 2004); the
 "survivor bias" in mutual fund ratings (March 2006); and the index fund
 "broker penalty" ( November 2006).
 
 
 
 
 
 
 
 
 

SOURCE Zero Alpha Group, Washington, D.C.; Fund Democracy, Oxford, MS;

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