Review & Outlook

Our take on the investing, financial, & economic themes of the day

Why No Mutual Funds at O’Brien Greene & Co.?

6 October, 2010 by admin in Philosophy

Over the past 40 years O’Brien Greene & Co. has not used stock and bond mutual funds in its client portfolios. Instead we have relied on individual stocks and individual bonds to generate income for clients, preserve the purchasing power of their savings from inflation, and make their capital grow over time. Mutual funds are good at diversifying relatively small amounts of money in the pursuit of these objectives, but for sums large enough to achieve diversification on their own, the drawbacks of mutual funds exceed their benefits, in our opinion.

One big drawback is complexity. There are thousands of stock and bond mutual funds; indeed, there are more mutual funds than there are individual stocks and bonds. The internal workings of each mutual fund is different, and the devil is in those details. While fund prospectuses are supposed to disclose the fees, penalties, charges and risks of each fund, the prospectuses are long and hard to understand, even for professionals in the business.

There are other issues to consider once you own a mutual fund: Is the fund sticking to its original investment strategy? What is its exposure to foreign currencies? Does it use leverage to supplement income or price volatility? Has the mutual fund been sold to another mutual fund company? Has its management changed in other ways, for instance, as key personnel have left? Is it under federal investigation for misconduct? It may not be possible to answer all these questions from the prospectuses, and even if it is, the answers change over time. We think the time and effort are more productively spent on the analysis of individual stocks and bonds. They are the source, the basic building blocks, of wealth management. And they don’t charge fees to own them. But there are other reasons to own individual stocks and bonds, especially for individuals who pay taxes.