The Greatest Wealth Destroyers

Last Updated Mar 5, 2010 9:54 AM EST

The active management faithful believe that the surest way to create wealth is to identify the great money managers and invest with them. Unfortunately, there's no evidence supporting that belief. On the contrary, the Morningstar 2009 Fund Flows and Investment Trends report provided evidence on how that faith was "rewarded."

Morningstar's report provided a list of what it called the five greatest wealth destroyers for the decade. Janus claimed first place on this loser's list, destroying $58 billion of wealth. Putnam destroyed $46 billion, AllianceBernstein $11 billion, Investco $10 billion and MFS $8 billion.

To be fair, it's important to note that the S&P 500 Index lost 9 percent over the decade. However, other asset classes fared far better. Below are the total returns of various asset classes for the period 2000-09.
Domestic

Returns (%)

International

Returns (%)

Large-cap

-9.1

Large-cap

12.4

Large-cap value

27.6

Large-cap value

41.4

Small-cap

41.2

Small-cap

52.3

Small-cap value

121.3

Small-cap value

198.6

Real estate

175.6

Emerging markets large-cap

154.3

Emerging markets small-cap

176.7

Emerging markets value

212.7

Investors with those fund companies should ask themselves why they would take the risk of their wealth being destroyed just to pursue the (slight) chance of outperformance.

Morningstar's report also provided evidence that investors have difficulty learning from their mistakes. Specifically, they tend to invest as if they were driving while looking through their rear view mirror -- buying yesterday's winners and selling yesterday's losers. That leads to a strategy of buying high and selling low, not exactly a prescription for investing success.

Consider that after the horrific losses of 2008 and early 2009, U.S. equity mutual funds and equity exchange-traded funds experienced net outflows of $25.3 billion and $14.5 billion, respectively, in 2009. Many investors missed out on one of the greatest equity rallies of all time. On the other hand, U.S. bond mutual funds and ETFs experienced net inflows of $356.5 billion and $38.7 billion, respectively. The flight to safety was so great that the bond inflows of 2009 eclipsed the net inflows of the prior five years combined.

There was one good trend that emerged, showing that it's possible for investors to learn from their mistakes. In 1999, actively managed funds held almost a 90 percent share of investor assets in mutual funds. By the end of the decade that figure had dropped to less than 80 percent. It appears that progress is possible, if painfully slow.
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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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