Midas Touch

The Not So Midas Touch - A Deeper Look at the Performance

Midas Touch

King Midas of Pessinus was a well-known character in Greek mythology that was praised for turning whatever he touched into gold, known as the Midas Touch. Some companies have embraced the story of King Midas and his touch within their own branding. Within the investment management industry, there are Midas Funds, bringing a host of mutual funds that attempt to provide above average returns to their investors. Their strategies include investing in the stock market as well as in gold. Our curiosity in examining Midas was the relatively poor performance of the Midas Magic Fund (MISEX) over the last 20-years (rollover the button at coordinates -6, 11 on the chart below). As we will show below, there was very little "magic" to find. 

We have examined numerous well-known fund families in order to educate investors that the active fund management industry is built on this illusion of expertise, excellence, and skill. See previous articles on Wells FargoMFS Investment Management, JP Morgan, Lord Abbott, USAA, Thrivent, American Funds, and Fidelity. This industry has become an advertising machine in attempt to overshadow the fact that their performance doesn’t stack up against statistical scrutiny. Midas is no exception. There are theoretical implications as to why this is the case and we seek to educate investors about these concepts that took root in some of the most prestigious academic institutions in the country. 

We begin our analysis by examining the costs associated with investing in strategies offered by Midas Funds. The costs include the expense ratios, front end and deferred loads, and 12b-1 fees. These are considered the “hard” costs that investors incur. What are not itemized in a prospectus are the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can roughly estimate, although it isn’t completely robust, the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered a very active approach to their investment strategies and for investors holding these funds in taxable accounts, there is a higher exposure to tax liabilities to short term and long term capital gains distributions versus passively managed funds. The table below gives the hard costs as well as the turnover ratio for all 3 funds offered by Midas that has at least 1 year of performance history.

Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Global Category
Midas MIDSX 11.00 3.04 0.25 Precious Metals Sector Equity
Midas Magic MISEX 37.00 3.59 1.00 US Equity Large Cap Growth
Midas Perpetual Portfolio MPERX 9.00 2.54 0.25 Allocation

On average, an investor who has utilized a fund offering from Midas has experienced a 3.06% expense ratio and a 0.50% 12b-1 fee. These fees can have a substantial impact on an investor’s overall accumulated wealth if it is not backed up by superior performance. Further, the average turnover ratio is 19.00%, which implies an average holding period for each individual stock or bond of 5 years. This implies that Midas, on average, makes investment decisions based on very a short-term outlook, which they believe they can accurately predict and exploit. In complete contrast, most index funds have an average holding period of decades upon decades, thus removing themselves from focusing on the random noise that characterizes short-term market movements and instead focuses on the long term.

Midas charges close to three times the average expense ratio found in actively managed mutual funds. Are they delivering three times the outperformance? We compared all 3 strategies against their Morningstar assigned benchmark since inception to see just how well Midas has done in delivering their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found:

  • ALL 3 funds have delivered a NEGATIVE alpha, which means that they have underperformed their respective benchmarks since inception

On average, the Midas underperformance has been 5.36% per year. They were not even close. Although there were some years where their funds outperformed, for the most part, their strategy can be characterized as being poison to any investor.

It is important to note that Morningstar assigned benchmarks are not robust in terms of matching the specific risk characteristics of a particular fund. A more robust analysis would be to run three factor multiple regressions of the monthly returns of each Midas fund against the known dimensions of expected return: market, size, and relative-price. We are, in effect, creating our own customized benchmarks for deciphering whether or not alpha is present once we control for the known risks that are priced in individual stocks.

We took all US based stock funds that have at least 10-years of performance history and ran multiple regressions for each to control for the known risk factors to see if there was existence of alpha with a high degree of certainty (t-stat>2). There was only 1 fund (Midas Magic Fund) that was eligible for analysis. After controlling for known risk factors, the fund delivered a negative alpha over the last 10 years ending 12/31/2015, which is what we would expect in a well functioning capital market. The results are displayed visually below.

Midas Funds has embraced the King Midas and his ability to turn anything into gold as a way of branding their ability to deliver value to investors. Unfortunately, nothing could be further from the truth. A more accurate analogy between the value of Midas Funds and King Midas is that both are a myth. 

 

We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review by clicking any of the links below:

 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.