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Rekenthaler Report

Buy the Fund Company, Not the Funds?

The adage is only partially correct.

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Two for Two
It's said that the stocks of mutual fund companies make better investments than the funds those companies manage. Certainly, the stocks have thrived. The few publicly traded mutual fund companies performed fabulously in the 1980s (Franklin and Dreyfus were among the very highest gainers of any U.S. stock for the decade), beat the market again in the 1990s, and have gained nicely in recent years, too.

For example, although  T. Rowe Price (TROW) missed the indexing boom, including the exchange-traded fund market, its shares have gained more than 400% cumulatively over the trailing 10 years. Just a shade behind, at 370% for the trailing 10 years through Aug. 31, 2013, was  Franklin Resources (BEN), which not only bypassed indexing and ETFs but also the surging 401(k) marketplace. Both companies succeeded at their core task of investing--more on that shortly--but the point remains: The mutual fund industry is a generous master. Over the past five years, 4 times as many  Eaton Vance (EV) funds have finished in the bottom quartile of its category than in the top quartile. The company's punishment? Its shares are only up 9.9% per year over the period.

John Rekenthaler has a position in the following securities mentioned above: MORN. Find out about Morningstar’s editorial policies.

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