Although scouring the business press for angry anti-capitalist tirades is a bit of a hobby of mine, most aren’t worth posting here. This one is. It details (from a business perspective) what’s wrong with Mutual Funds – and it makes a couple very good points.

The Mutual Fund Industry Is A Huge Scam That Costs Investors Billions Of Dollars A Year

Mutual funds don’t work. In fact, on average, professionally managed funds actually perform worse than simple index funds (ie: a fund based on the S&P 500). And more expensive funds actually tend to perform worse than cheaper ones. Why? Because of the cost of professional fund managers.

The lower the cost of a fund, the more likely it is to do well in the future (relative to other funds). The higher the cost, meanwhile, the less likely the fund is to do well. This is one reason that index funds outperform “actively managed funds” (funds with managers paid to pick good stocks and sell bad ones) year after year: The manager’s salary is deducted from the fund’s returns, and most managers aren’t good enough to offset the cost of their salaries and their employer’s profits.

Refreshing, if brutally honest. So why in hell do we hire hordes of these “experts” for some of the highest wages around? And why would anybody choose to buy into these funds?

This is where having a little anticapitalist background comes in handy. Would the markets be better off if we fired all these managers? Of course – but that’s true of many kinds of managers – and none of that kind of firing is about to take place (for obvious reasons). Mutual funds and others like them exist as a way of giving us “ownership” of capital without any actual control.

A century or more ago, the old definition of “proletarian” (somebody without property) was usually literally true. People joined the industrial workforces because they had nothing but the clothes on their backs (and kids to feed). Today, many working-class people own homes, pension plans and retirement savings – all forms of capital. Unlike capitalists, however, this ownership conveys very little control. We don’t get to use our shares to vote in companies, or dump their stock when they’re misbehaving. We can’t lean on borrowers in the way big lenders can – even if it’s our money being lent.

Capital is quite literally control. More specifically, it’s control over productive resources – land, machines, patents etc. Capital is defined by this productivity and the ability to own and trade it. In the world of stocks and bonds, that means control over companies. Owners and investors have a tremendous amount of influence over those they entrust with “their” money, yet we see none of that when we fill our RRSPs with mutual funds. In essence we’re paying for the privilege to play capitalist, with none of the real benefits attached.

Why let us own capital at all? Because it’s far less threatening than simply handing us cash. In these neutered forms, we can lend massive sums of money at low interest rates – something capitalism desperately needs. It allows us to feel like we’re rich too – maintaining the illusion that we’re all part of one big happy middle class. It prevents us from building up enough cash to buy any meaningful form of capital (garden space, power tools etc). And of course, it cuts their losses severely if something goes wrong. With traditional arrangements, like bank accounts or wages, capitalists had to pay whether or not they were doing well. Now it’s reversed – they’re “working” (by investing our money), so they get paid no matter how their bets turn out.

The modern financial industry is filled with these kinds of million-dollar make-work schemes. The sheer number of people (to say nothing of their pay…) working to buy and sell money in the name of “creating efficiency” is mind-blowing, as is the power they command. We are quite literally paying people to own our money for us.

Doesn’t sound very “mutual” to me.

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