The Ugly Game of Assets Under Management

Get this into your head: Mutual fund companies are not in the stockpiling business or even the investing business. They are in the asset-collection business. They call it AUM and, like the yoga mantra “om,” they repeat it endlessly to assure a happy life.

AUM means “assets under management” and that’s the name of the mutual fund game. The value of a fund to the owners of the fund, in cash, is about 20 percent of the AUM. If you are a fund owner and get $50 billion AUM, when you sell the fund (or take it public), you get to take home about $10 to $18 billion, with a “B”.

Pop quiz: If you kept 20 percent of every dollar you raised, would you be in the stockpiling business or the dollar-raising business?

I’d say the only thing you care about is getting more dollars.

Gathering AUM requires heavy spending on advertising and marketing to sell the dream. But there’s nothing in there about delivering on the promises they make. They just have to sell the hell out of themselves and then not do too much worse than the other AUM boys. There’s always some hardworking, ignorant, and trusting soul looking for a place to put a bit of extra money who is clueless about how the game is played.

They’re going to sell you every way they can, and if that includes hiding facts and twisting statistics, they’ll do that, too. Some of these people are the ones who brought you the derivatives market meltdown and still paid out bonuses in 2008 in spite of the fact their wisdom, experience, advice, and management lost you a huge portion of your retirement.

And consider this: Do you really want to trust your investment decisions to a company that can’t keep its own boat afloat? In 2008, three of the Big Five investment banks—Merrill Lynch, Bear Stearns, and Lehman Brothers—went bankrupt or had to be sold to avoid bankruptcy. The other two —Goldman and JP Morgan—have been in critical condition, hooked up to IVs delivering much needed capital from outside sources like taxpayers and investors.

These are the same guys whose analysts—who you’d think should have a better pulse on the market than the average person—were encouraging buying stocks when things were about to get ugly.

In 2000, for example, Merrill Lynch analysts said there were 940 wonderful stocks to buy and only 7 to sell. Salomon said you should buy 856 and only sell 4. First Boston analysts were more negative. They only found 791 stocks to buy and all of 9 to sell. And Morgan Stanley said there were 780 wonderful businesses to buy and exactly none to sell.

This, right before the market plunged as much as 90 percent in some of these recommended stocks. The week that Enron went bankrupt, nine of the fourteen investment banking companies who were covering the stock had a “buy” rating on it. None said to sell it. And how many were shouting “Get out!” in late 2007? None. Why? Because they aren’t in the business of investing. They are in the business of AUM. The investment banks that failed deserve what they got. They were greedy and they paid the price. Too bad they are taking your retirement down with them.

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Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.