Portfolio Manager: Mutual Fund Industry is BROKEN

I founded Rainwater Equity after serving as portfolio manager at TCW for many years, and prior to that at Fidelity. I really founded the firm because I felt the mutual fund industry, particularly on the equity side, is just broken. 93% of funds underperform their benchmarks on most measurable periods of time, one year, three year, five year. The industry just doesn't work.

I believe the reason the industry is broken is because portfolio managers take a flawed approach to investing. That flawed approach is looking at every individual business in an index and trying to come to a conclusion as to the future prospects of that particular business by deploying dozens or hundreds of MBAs who are really smart to assess each business and then provide the portfolio manager with a recommendation as to how they should invest relative to those benchmark weights.

That approach doesn't work, and the reason it doesn't work is I believe most companies can't be predicted. If you can't predict where a business will be in a year or two, then you certainly can't predict where it's going to be in three or four years, and that makes it very, very difficult to value and difficult to make an appropriate appraisal.