The Motley Fool's Record Doesn't Bode Well for Its Funds

As we noted yesterday, the financial Web site the Motley Fool dispenses some good advice, but fails to back that up when creating their own mutual funds. They're demonstrating that like most of Wall Street and the financial media, their interests come before yours.

About a decade ago, the Web site used to maintain real money model portfolios. This was pretty distinguishing at the time, as this meant their strategies were in the public's full view. Unlike some money managers and newsletter publishers who require a "just trust me" approach, the Motley Fool was subject to open scorn for underperforming.

At the end of February 2003, the brothers announced that they were discontinuing publication of their real money model portfolios. Why would the Motley Fool choose to get rid of their portfolios? According to their Web site, the Motley Fool concluded that the real-money aspect of their portfolios had gotten in the way of their educational function.

Given the track record of their portfolios, a cynic would suggest another answer. Being skeptical of all claims of ability to beat the market, we went to our trusty videotape to check the performance record of the Foolish strategies. According to the calculations of the Hulbert Financial Digest, the Motley Fool's portfolios produced a 1.3 percent annualized return over the six-year period that Hulbert tracked their performance. Over the same period, the Wilshire 5000 (a broad market index) produced an annualized return of 3.4 percent. This is a comparable result to the findings of numerous studies on actively managed mutual funds -- they underperform by approximately 1.5 percent per year on a pre-tax basis.

It's also important to note that Hulbert's data includes several portfolios that the Fool used to maintain but were discontinued along the way. Thus, there's none of the usual survivorship bias in the data. Obviously, the Fools had been fooled into believing that they had found strategies that were likely to produce above market returns. One last note of interest. The man responsible for running these portfolios was William Mann, who currently runs the Motley Fool funds we examined yesterday.*

On the surface it appears that the Fools have failed to learn from their past mistakes (engaging in insane behavior). There's also another explanation for such Foolish behavior. The Fools know that their funds aren't likely to outperform, but they're likely to generate profits for them because of the high expense ratios of the funds, the very type fees they have been lambasting for years.

* To clarify, William Mann served as the senior analyst for the Motley Fool during some of the period Hulbert examined, not for the entire period. Apologies for the error.
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