Mutual Funds Bull's Pen
by Rick Munarriz ([email protected])

Defending managed mutual funds? Right away, you are probably against me. Why learn to ride a bike only to screw back on those training wheels? They are cumbersome. They scream Novice. They hinder performance.

I hear that, but I still won't sell my shares of Mutual Discovery or Heartland Small Cap Contrarian. Why should I? Because most mutual funds lose out to the unmanaged S&P 500 Index? This just in: There has never been an index fund to match, much less beat, its respective benchmark. Sure, they usually trail by just a few scant basis points a year, but if you enjoy the fact that 91% of all mutual funds underperform the S&P 500, do not take solace in the fact that 100% of all index funds fail as well.

Beyond that I just sleep better at night knowing that a Michael Price or a Ralph Wanger is managing my money -- not the random whims of a rudderless market. You see, they not only manage funds, they also manage risk.

We tend to focus on results exclusively because it is just easier that way. Maybe it's because we feel we'll strain our necks by looking above the bottom line. Yet that is a problem. I love equities. I love that new stock smell. I like to do my due diligence on a company and point towards the left field fence as I aim for a four-bagger. But there is also that conservative part of my modest portfolio that likes to bunt for a single, reach second on a hit-and-run, steal third and score on a sacrifice fly.

Let's take a quick look at Merger Fund, a part of my wife's IRA. The fund engages in merger and acquisition arbitrage. After a merger is announced, the company being bought out often trades at a discount to the eventual takeover price. Merger Fund will review the deal to make sure the chances of completion are good and then buy a stake in the company to be acquired and short the appropriate amount of shares in the acquirer if it is a stock transaction. Some deals will fall apart. Some will attract higher bids. In concert, the fund has averaged 10% a year with the beta of a money market fund. I have neither the time nor the capital to cash in on the economies of scale of this unique and relatively riskless strategy. And what about the similarly conservative Gateway Index Plus fund, which will buy the S&P 100 stocks then write calls on the stock to collect the premiums. Limited upside? Sure. Steady returns? Definitely.

Then we have international funds. The merits of global investing are beyond this Duel, but if I were to allocate money for overseas investing, you better believe that I will feel better about a Mark Mobius or a David Herro taking the time to visit the companies and analyze the currency risks than I would with a stampless passport in one hand and a world atlas in the other.

We're all Fools here. So what if I told you about two young guys who started a portfolio just a few years ago. They bought what they knew. They got into Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> as early as most of us did. Tom and Dave? Nope. Kam and Landis from Technology Value, and not only have they trounced the S&P 500 over that time, but they also got out of Iomega when it peaked two years ago.

The thing is, with as many mutual fund managers as there are publicly traded companies, why can't there be Foolish fund managers? If Dave Gardner and Jeff Fischer, who run the Fool Port, were to start up a mutual fund do you think it would be worth your consideration? Maybe, right? What about Warren Buffett? After all, what is Berkshire Hathaway if not a closed-end fund? Peter Lynch was pretty bright, wasn't he? Can we praise the individuals while badmouthing the instruments? I don't think so.

The scary thing is that Pauly and I tend to gravitate towards the same investments. Those who have stopped by during our Sunday night hosted chats on AOL's Motley Fool site have probably noticed this too. While it has been a money-losing proposition for James Crabbe, I think Pauly would admire the Crabbe Huson Special Fund's tenacity in buying value stocks and shorting the bejeezus out of the Yahoo's of the world.

Pauly may argue that it doesn't matter. He is a bright guy. He can do it himself. He can. He does. Why absorb so much only to give it away? Why fight for the empowerment of the individual investor only to squander that freedom on the institutional ones?

I'll tell you why. Because Community matters. It may sound like a Motley paradox, but what I love about this place is that we have come together to say we can do it alone. We profess to educate and amuse, but in reality we are all just ever-thirsty sponges, learning from each other through text, through message boards, through chat rooms. We lean on one another around here, and while that means yelling, "I am Fool, here me Roar!" from the summit, it also comes with the humility to accept the fact that a little mental diversity goes a long way towards a balanced portfolio.

So while I would never want to lose control of my finances, I don't have a problem with trusting a slice of that pie to a Mario Gabelli or a Ron Baron -- or a Pauly Larson, if he should ever aspire as such.

Next: The Bear Argument