Despite recent gains in stocks, mutual funds have far to go

ByABC News
July 5, 2009, 10:38 PM

— -- The average stock fund has gained 17% the past three months and 6.5% this year handily outstripping the Standard & Poor's 500-stock index. Aside from the stock market's recent upturn, though, investors don't have many reasons to rejoice.

Even counting the most recent stock rally, fund investors have seen 37% of their savings disappear since the market peak in October 2007.

"I am very displeased with the management of the funds that I owned," says Robert Wells of Largo, Fla. "The fund managers are advertised as being professionals, so why did they ride the market all the way to the bottom with my money?"

The fund industry can't control the stock market, but the criticisms leveled against the industry before the bear market are still true today: The funds still command high fees for their services; the industry pumps out new, faddish funds at a frenetic pace; and scandals plague the industry.

"The industry has not done the individual investor a lot of favors," says Dan Wiener publisher of The Independent Adviser for Vanguard Investors.

Catching a break?

Long-suffering stock-fund investors caught a break this quarter, as funds scored the first winning quarter in a year, according to Lipper, which tracks the funds. And a few types of funds, mainly emerging-markets funds, scored enormous gains:

Latin America funds, up 44.2% this year.

China funds, up 37.4%.

International small/midcap funds, up 21%.

This year's top fund, the tiny Oceanstone fund, soared 128%. And Fidelity Select Auto, one of the most surprising leaders for the year, roared ahead 56.5%, in part by avoiding General Motors.

All those gains are great for the few investors who were in them. The largest stock funds, which are most likely to be in a 401(k) plan, scored more modest but still welcome gains so far this year (see chart, 4B).

Nevertheless, those gains pale in the face of the enormous losses investors have endured for nearly a decade. Had you put $100 a month into the American Funds Growth Fund of America for a decade, for example, you'd have $12,124 today. But you would have invested $12,000, so your gain for the entire period would have been just $124 and that's not counting the fund's sales charges, which can be as high as 5.25%.