January 12, 2012

If you build it, they will come...

Seuk Kim
The title of this blog is the often misquoted line from the movie Field of Dreams, starring Kevin Costner. The actual line ends “he will come,” but I think the misquote is more relevant when it comes to mutual fund marketing.
To those that have seen the movie, you will know that the line refers to the main character building a baseball field out in the middle of his farm’s corn field because of a voice in his head repeating it over and over again. Later in the movie, you find the true meaning of the line.

Great and perhaps true if you’re planning to follow in Ray Kinsella’s (Costner’s character) footsteps in building a baseball field, but many mutual fund companies also tend to listen to this ill advised suggestion. They make the mistake in thinking that if they start a fund, the investors will come. Unfortunately, this is not the case as noted in a prior blog by my colleague Dan, Death of a 5 Star Fund.

Another big mistake that mutual fund companies make is thinking that if they have good performance, it will attract investors. In some cases, this is true and if all else is equal then performance certainly helps attract investors; however, performance alone is not enough to attract a sizeable asset base.

To prove my point, I give the following examples which are from recent WSJ/Dow Jones Mutual Fund Performance charts of the best and worst performing Large Cap Growth and Value funds. The funds’ names are blurred out to protect the innocent.

The numbers may be quite surprising:

The top performing Large-Cap Growth fund (YTD) has just $2 million in assets.  In fact, the top three funds in this popular category combine to have under $100 million in assets! Furthermore, all of the top 10 performing funds combined have less than half of the assets of the worst performing fund in this category.

The large-cap value category is a little more evenly distributed, but the assets in the bottom 10 still outweigh the top 10 with more than half of the top 10 best performing funds having $76.3 million or less in assets.

Keep in mind that these are YTD numbers, but you get similar results when you screen for 1, 3 and 5 years. I happened to be looking at the WSJ Category Kings when I noticed this phenomenon, which is why I’m using their chart.

As mentioned before, performance certainly helps but as you can tell by some of these funds that have the worst performance and have hundreds of millions (and sometimes billions) in assets, marketing and distribution is likely just as, or perhaps even more, important.

So in the world of mutual funds, “if you build it and have a good marketing and distribution strategy….they will come.”

by Seuk Kim

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