Diversification through Mutual Funds

During the previous Investment Tips we talked a lot about the importance of diversification. It could take the appearance of a certain number of investment instruments like bonds and stocks. A good balance between assets is also a smart way to diversify your portfolio. From that perspective we saw during the last investment tips how worldwide prosperous people diversify their portfolio which is without any doubts a good point of reference.

People are used to diversify their portfolio through investments in financial instruments like Mutual funds or through a large basket of individual stocks. Belgian investors have also a lot of experience with holdings like GBL or GIMV which are evidently means to diversify their assets.

I'll dedicate the next investment tips to detail those different instrument of diversification.

Lets start with the Mutal funds - a brief history :

The story started in the end of the 18th Century in the Netherlands. In the entourage of King William the 1st a certain Adriaan van Ketwitch created one of the first investment fund called "Eendracht maakt magt' ("Unitiy create strength" which is also known as the emblem of Belgium who took his indepence from ...The Netherlands a few years later in 1830 but that's another story..).

In the modern years MFS (from Boston Massachusetts), still active, created the first open fund in 1924. State Street was the custodian of MFS and Saltonstall one of the owner of State Street developed with a certain Mr. Scudder (well known by the investors) the first no-load fund (distributed directly by the investment company - without charges and sales commissions). 

The first US rules directly assigned to Mutual Funds were achieved in 1933 with the creation of the SEC (police of the banks - Securities and Exchange Commission) and in 1934 the first law to protect investors was approved.

During the next decades people and the market recovered from 1929's crisis till 1954. Assets were growing and innovative solutions were found in the '60 with the emergence of aggressive growth funds and in 1971 Wells Fargo established the first index fund.

The golden age of the Mutual funds market was clearly identify between the '80s and the '90s during the bull market when very popular fund managers informed people and were the under brand of big names. Remember Peter Lynch (Magellan and Fidelity Fund - known for his annual return of 29, 2 % between 1977 and 1990) - Mark Mobius (Franklin Templeton - Emerging Markets) everyone know Warren Buffet the "oracle of Omaha" through the Berkshire Hathaway fund - In France Edouard Carmignac with the Carmignac Patrimoine - George Soros in the Hedge funds - do you remember he is the man that broke the bank of England through his Quantum fund and forced the Bank of England to devaluate the pound in 1992. And then we have had the explosion of the tech bubble and the 11th of September the beginning of a new area.

Another advantage of  mutual funds, is for the la crème de la crème the ability to go behind the figures and discover sometimes companies with a huge potential. Let's discover one of those success story, so please have a closer look on that picture. You use their products probably every day...Microsoft, yes Bill Gates the richest man in the world is the tinny guy on the left side..and Fidelity invested in their team.

What about the figures? 

The Mutual fund market is still growing. In the US since 2001 the mutual fund market has ..tripled, they represent approximatively 50 % of the worldwide market with 15 Tril USD.

International Market : 

Worldwide number of mutual funds : 80.000 (10.000 in the US)Assets : 31 trillion USDMarket share ranking: 1. Fidelity 29,8 % - 2. Vanguard 26,7 % - (..)       5. JP Morgan 3 % - (...)  8. Wells Fargo 2,5 % etc

Belgian Market :

A Mutual fund market of 135 BIL EURBonds 23,4 %Equity 32,4 % Pension funds : 11 %With capital protection : 8,4 %Real Estate : 7,2 %

As you can observe through Mutual Funds people can invest everywhere and in different sectors: - stocks - bonds - cash - hedge funds - private equity funds - holdings.  In the last decade we saw the emergence of the crowdfunding. Which was created for startups in order to support the development of their activity in a crisis environment where banks are less disposed to lend money and where personal investors are looking for an alternative to the poor level of interest rates. 

So what about you, about the Belgian investor and the mutual fund industry in our country after the extinction of well-known dinosaurs of asset management?

This analysis comes from a study made by Morningstar. In Belgium, customers have most of the time the choice between the funds proposed by their own banks and insurers which is clearly an environment of closed architecture.

Following an article of the De Standaard written in 2005, in Belgium, BNP Paribas Fortis, Belfius, ING, KBC/CBC represented 90% of that specific market so why should they diversify? Even if in the Private Banking due to the requirements of the clients, is more often offered. Morningstar highlight that Belgian investors don't have access to the whole mutual funds distribution channels. Which means that the banks work for their own interest. Which means that they catch for themselve the entrance fees, management fees, trading costs which is very attractive. The aim of the message is not to stigmatize the banks or insurers but sometimes it could be interesting for the client to look for an open architecture or alternative products because of the diversification or for a specific expertise.

In conclusion, it's important for the consumer to stay informed and compare products through independent platforms like Morningstar. Anyway if you invest through a good mutual fund you'd implement the strategy of Peter Lynch explained through this quote : 

In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won't outperform the money left under the mattress.

........in the next "Investment tips" we will explore the ETF world.

Thanks for your time!

Sébastien

@sebvanapasel

Sources : 

https://www.rabobank.be/fr/savoir/actualite/articles-de-presse/2013/trends130530fondsen.aspxhttp://www.investopedia.com/articles/mutualfund/05/mfhistory.asphttp://www.statista.com/statistics/235553/assets-managed-in-mutual-funds-worldwide/http://www.beama.be/fr/statistieken-fr/trimestrieel-fr/statistiques-4ieme-trimestre-2014http://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/2014-Target-Date-Series-Research-Paper.pdfhttp://corporate.morningstar.com/US/documents/PR/GFIE_Press-Release_Belgium.pdfhttp://www.ici.org/pdf/rpt_distrib.pdfhttp://www.standaard.be/cnt/gm5i2hkq