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Buy the Firm or Its Mutual Funds?

It's been more lucrative to own shares of a fund company's stock.

Dan Culloton, 02/07/2006

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"I decided there was only one place to make money in the mutual fund business--as there is only one place for a temperate man to be in a saloon, behind the bar and not in front of it--so I invested in a management company."

Nobel Prize-winning economist Paul Samuelson said those words at a 1967 Senate hearing on financial legislation, but it doesn't take a genius to see the truth in it. We compared the returns of the shares of publicly traded mutual fund companies with the average returns of their mutual funds and found Samuelson's quip to be as incisive today as it was nearly 40 years ago. In most cases, investors would have done better with the firm's stock than with its average stock fund.

The dichotomy was consistent across all time periods we examined. Over the trailing one-, three-, and five-year periods ending Dec. 31, 2005, the shares of more than 70% of the public fund companies in our database outperformed the typical equity fund in their respective lineups. During the 10-year period ending Dec. 31, the shares of each and every public fund company did better than their average stock funds.

Big Difference

The difference between fundholder and shareholder returns was often stark.

The shares of U.S. Global Investors GROW rose 24% on an annualized basis over the 10-year period ending in December, or five times the gain of the small shop's average equity fund. Over the same time period, the shares of Eaton Vance EV rose more than 33% on an annualized basis, which was quadruple the average return of the typical Eaton Vance stock fund. Meanwhile, the shares of Alliance Capital Management AC increased by an annualized 25%, or more than three times the return of the average AllianceBernstein equity fund.

The average funds of only two families, Janus JNS and Waddell & Reed WDR, consistently beat the returns of their parent company's stock. The funds at each shop edged the shop's stock over the one-, three-, and five-year periods. That says more about internal turmoil at the respective companies than the performance of their funds, though. Janus has been through a wrenching period of leadership change, restructuring, and regulatory penalties in the wake of the mutual fund trading scandal and early 2000s bear market, which bled assets from its growth funds. A dispute with a former broker, which the firm recently settled for $7.9 million, as well as concerns about stricter regulations for brokers and advisors, has weighed on Waddell & Reed.

Major Margins

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