I don't believe Motley Fool is any worse than others who convey the impression they have found a way to "beat the markets." My problem with them is they are more effective. They have built an extremely successful website, fool.com. Recently, they branched out into the fund management business. Among the funds they offer is the Motley Fool Great America Fund (TMFGX). A reader sent me a pitch for the fund. It is well written and very persuasive. Let me give you the other side of the story.
According to the sales piece, Tom Gardner and his brother David started The Motley Fool in their parent's garage in 1993. I applaud their entrepreneurship and their ensuing success.
They formed the Great America Fund because they "believe in America." Here's their investing methodology: They "scour the market for small-and mid-cap American companies." They only invest in companies they believe in and "truly understand". Here's their closer: "When you invest with us at Motley Fool Funds, you are investing in partnership with a small, dedicated team of stock analysts and a value-obsessed manager whose sole mission in life is to dig up the market's hidden opportunities."
Before you reach for your checkbook, here are some facts to consider:
According to the sales presentation, as of August 31, 2012, the fund had annualized returns of 10.60 percent since its inception on November 1, 2010, barely outperforming its benchmark return of 10.31 percent. However, as of the same date, its one-year total return is 10.90 percent, significantly underperforming its benchmark of 13.30 percent.
Do you believe William Mann III, the fund manager of this fund, is at the top of his game and vastly superior to the most brilliant managers running much larger, comparable funds? According to a blog by Jay Franklin, who analyzed a recent report issued by Standard & Poors, for the five-year period ending December 31, 2011, 86 percent of mid-cap domestic equity funds were outperformed by their benchmark index.
According to Yahoo Finance, the fund has a net expense ratio of 1.35 percent. The American Association of Individual Investors notes that a common problem with mutual funds with low assets under management is they will have high expenses relative to the amount of assets they manage.
Keep in mind that the Great American Fund has total assets under management of only $62.35 million, according to Yahoo Finance. Vanguard's Mid-Cap Index fund (VIMSX) has a much lower expense ratio of only 0.24 percent. It has net assets of $30.37 billion. According to Yahoo Finance, for the period ending August 30, 2012, the 10-year return is 9.06 percent, the five-year return is 1.89 percent, the three-year return is 15.33 percent, and one-year return is 11.51 percent.
The track record of Motley Fool gives little comfort. I applaud it for candidly disclosing on its web page that a number of its investing strategies have been discontinued. It closed its Running with the Market Portfolio after it lost over 60 percent of its value. It also discontinued its Retiree Portfolios, Boring Portfolio (which gained 7.7 percent during the tenure of its portfolio manager, versus 63.6 percent for the S&P 500), Harry Jones portfolio, Foolish Four Portfolio (after it ran tests of the Dow-dividend strategies which turned out to be "not encouraging"), and Workshop Portfolio (due to a dispute with Value Line).
You could conclude that Motley Fool has been experimenting with various strategies for beating the market. So far, the secret sauce has eluded them and everyone else engaged in the same activity.
The hypocrisy of Motley Fool is stunning. It purports to be a strong advocate of index-based investing, which it considers to be "an important step in the ladder to successful investing". In fact, it correctly notes that for many investors, index investing can be their sole strategy.
Yet, with its actively managed funds, it tells investors it has the ability to beat the markets. Based on its own track record, its inconsistent positions on intelligent investing, and overwhelming academic data, I can only reach this conclusion: This is foolish advice.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.
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