Wall Street ballyhoo and flim-flam to the contrary, the year 2005 closed-out half a decade of misery and pain for the average investor in US equities according to Federal Reserve flow of funds accounts F102 and L102.

	Investors Forsaken by the SEC

During these years, the SEC, the investors’ watchdog, had forsaken investors and averted its gaze from the diversion of shareholder wealth through buyback-option schemes, while appearing to protect shareholders’ interest with the show trial of Martha Stewart, for a matter unrelated to ordinary investors’ well-being.

With January 2000 as a starting point, the Federal Reserve flow of funds accounts show that stock investors were down $4.3 trillion in portfolio value and dividend payouts in 2005 were only running at about the same level as in 2000, five years earlier.

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Mutual funds are sold primarily on the basis of ‘performance’ measured by historical ‘total return’.

The famous Morningstar rating system is based on ‘total return’, in this case ‘risk-adjusted total return’ relative to funds of the same asset category.

The average American mutual fund investor is accumulating resources for retirement, say 20 or 30 years hence. The typical owner of mutual funds is unsophisticated and does not delve deeply into the significance of Morningstar ratings or total return figures.

The SEC allows promoters of mutual funds to trumpet historical ‘total returns’ as long as there is a disclaimer that “past performance is not necessarily indicative of future performance”.

A question worth considering is this: “Are investors being mislead by statistics on total return?”

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Net sales of mutual fund shares dropped to the lowest point in the three years 2003-2005, with net sales of $257.5 billion. (See: Federal Reserve flow of funds account F214.)

Net sales of mutual funds fell almost 14% from 2004 to 2005.

Of net mutual fund sales, the amounts invested in corporate equity fell from 52.7% in 2004 to 49.9% in 2005. (See: Federal Reserve flow of funds account F122.)

The drop in mutual fund sales helps explain why stock buybacks became less effective in 2005.

Weak fund sales in combination with historical over-valuation of stocks and the impending retirement of baby boomers, are a portent of weakness in the U.S. equity market.