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For Investors, It's All About Performance


Just as in real estate it's all about location, location, location, for mutual funds, it's performance, performance, performance.

The key driver to mutual fund companies providing customer satisfaction is investment performance, and performance consistency will keep investors loyal to their mutual fund company, according to a survey from Cambridge, Mass-based Cogent Research.

The survey found that the primary driver of future investments and the likelihood to recommend someone to their fund company is investment performance. The second is consistent fund performance.

For the survey, "Cogent Investor Brandscape," the firm conducted online interviews among 4,000 affluent individuals with at least $100,000 in investable assets. A significant portion of this group was high-net-worth investors, with more than $2 million in investable assets.

"Investors want to know that a fund has consistent performance, but also how it is achieved and [whether it] can it be done on a constant basis," said Jennifer Patenaude, market strategy analyst at Cogent and author of the study.

"Everything has to do with performance," said Jeff Tjornehoj, a senior research analyst with Lipper of New York. Ultimately, people can only retire on performance, and there are very few reasons why people leave a fund other than performance, he commented.

The mutual fund industry is competitive, and someone is going to outperform someone else all the time, he added. After several quarters of underperformance, customers typically begin to question whether the manager has talent to overcome setbacks and persevere, Tjornehoj said.

Twenty-three percent of investors said that consistency of fund performance was keeping them loyal to their fund, 18% cited commitment to investment philosophy, 16% pointed to an individual fund manager, 15% said recent investment performance, 10% noted fees and expenses, and 19% stated a mixture of metrics.

It is difficult for companies in general because there is not a lot of fund loyalty among customers, Patenaude said. The number is negative in terms of loyalty; out of 38 mutual fund companies that were reviewed, only 11 had positive loyalty scores.

Cogent calculated customer loyalty scores based on the customers' intention to recommend someone to their fund company. Respondents who rated their fund an eight or higher were deemed "supporters," while scores of one to three were deemed "detractors."

The top three firms with the most loyal customers were Vanguard Funds, Dodge & Cox and Schwab/Laudus Funds.

The firms that received the highest rating for consistency of fund performance measured by the number of investors who rated performance an eight or better were Dodge & Cox, with 78%; American Funds, with 66%; and Schwab/Laudus Funds, with 65%.

There are a few factors that can weigh into the equation when customers contemplate leaving a fund. Customer service can be an important factor. If a client feels comfortable with how they interact with customer relations, they will most likely take that into consideration when making a decision, said Niels Holch, executive director of the Coalition of Mutual Fund Investors in Washington.

To retain clients, companies can show consistent fund performance, and to an extent, craft a message that makes investors aware of the brand and helps them to feel comfortable, Patenaude said.

Another reason that clients may jump ship is because of their perception that they need to diversify investment products and across families. Also, some investors are constantly chasing hot-performing funds, Patenaude noted. Reputation plays into this, and the mutual fund scandals are partly to blame, as well, she noted.

The survey also found that one-third of affluent Americans have a significant portion of their investable assets in a former employer's retirement plan instead of their current employer's plan or an individual retirement account.

Of the 76% of wealthy Americans who have an employer-sponsored retirement plan, 44% have assets in a former employer's plan. This proportion is even higher, 53%, among the wealthiest of Americans, those with investable assets of $5 million, Cogent found. The average account balance is $259,521.

Investors need to be educated as to what the best course of action is, and that can vary for individuals, Patenaude said.

"The fact that so many high-net-worth Americans are leaving assets in the plan of a former employer demonstrates that many investors have not been offered a sufficiently compelling rationale for moving these assets," said Chris Brown, managing director of the financial services practice at Cogent. "A lot of money is being left on the table by broker/dealers, banks and insurance companies," he said.

It is rarely a good idea to leave your money in a previous employer's plan, Tjornehoj said. However, if an investor was formerly in a top-notch plan and had access to great funds, and the alternative is an expensive, poor performing fund, then it could be justified to leave the money in the former plan, he said.

Investors may leave behind retirement assets because there is lack of motivation to transfer assets over to the new employer, or they may not know how to move assets to the new employer or roll them over to an individual IRA, experts stated.

Especially if investors are not working with a financial planner and receiving advice, they tend to leave assets in a former plan, Holchs added.

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