By: Jonathan Chevreau, National Post (Canada)
Published: December 20, 2006
Jonathan Chevreau is a highly regarded and well-known business columnist in the Great White North. In today’s National Post, he picks up on Chet Currier’s musings about the possible “End” of mutual funds. Although Chevreau is a critic of Canada’s “world-beating” mutual fund fees, he still includes the obligatory question mark in the title of this piece (note that Currier included same).
Chevreau cites one analyst whose thinking is remarkably closely aligned with ours:
“Once investors realize mutual funds are essentially “host funds” for an embedded ETF (beta) and an embedded hedge fund (alpha), ‘the pressure on advisors to justify their fees will only increase,’…”
Too Complex For the Masses
In response to Chevreau’s column, Stephen Gadsden, a financial journalist writes on Chevreau’s blog:
“While I commend your efforts to educate the reader about the high costs of mutual fund investing, most mutual fund clients couldn’t tell the difference between an alpha and beta, or omega for that matter. And they never will make the effort to do so.”
As advocates of alpha-centric investing, you might guess that we have heard this type of skepticism before. But no matter how many times we are told that individual investors are incapable of understanding these concepts, our jury remains out.
If the business media itself is any indication, individual investors are able to comprehend far more complicated topics. For example, today’s National Post itself contains a column that lists the financial terms of a recent US$1.14 billion public offering by a property manager, an article containing gasoline futures quotes and distillate fuel inventories, and this excerpt from a story about investing in income trusts (a unique Canadian retail investing phenomenon whose pricing has confounded individual investors and professionals alike):
“Alta Gas Income Trust: Calgary-based, this trust gathers, processes and transports natural gas in western Canada from various facilities which Alta Gas owns. This is some 70% of its business. There is also a power generation segment, where Alta Gas acts as a re-seller of power ‘at favourable prices.’ The trust trades at an EV to EBITDA of 10.5 times, using 2006 estimates…In addressing the energy segment of the income trust universe, Bay is using a natural gas price of between US$7.50 and US$8 per mmcf and an oil price in the range US$55 and US$60 per barrel in his estimates.”
Mutual Funds: Once Imprudent, Now Ubiquitous
Not long ago (perhaps 25 years) mutual funds were seen by individual investors as “playing the markets” and therefore only suitable for institutions and the wealthy. But years of education has helped these investors overcome initial squeamishness and today, as both Currier and Chevreau point out, mutual funds are the dominant investment vehicle for private investors.
To be sure, investor appetite for new ideas exists on a continuum. But it seems that most investors eventually made the effort to understand mutual funds. And, unlike Gadsden, we believe they eventually will make the effort to understand the relatively straightforward concepts of active and passive management.