Summer is almost upon us, which means more outdoor activities like going to the beach and swimming. It's almost impossible to sit in the sand without building something - whether it's just a mound of sand or an elaborate castle. If you were going to build a sandcastle, you would likely employ the same strategies to build a sandcastle that you would to grow a mutual fund.
Foundation is key
Consider this: sandcastles require strategy, patience, and persistence. Though the materials involved are very basic – sand and water – the correct mixture of each element is crucial to building a durable sculpture. Selecting a spot on the beach to build your sandcastle is equally as important because you need moist sand to hold the proper form, but you don’t want it too close to the water or the high tide and waves rushing in will wash away all your hard work. Even so, over time, this is exactly what nature will do. So, you need to continue adding sand and fortifying your castle as wind, waves and weather erode your castle.
Look out for erosion
The same is true if you manage a mutual fund. According to the Investment Company Institute, the average rate of redemption of assets over a five-year period is approximately 26% per year; slightly higher for taxable bond funds than equities in general. And, if you’re losing 26% a year…well, just do the math. That doesn’t bode well for the sustainability of your mutual fund. The assets you have today erode through natural attrition such as:
- Need the money,
- Chase the hot sectors,
- Rebalance, or
- Life change.
New flows are needed, not only to grow, but just to maintain the status quo. Some firms are able to earn growth with good performance. But most have a strategy designed to attract investors and strengthen distribution by communicating the good news.
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