Zombie Funds: When You Pay Fees for Nothing
By Diego Alcalá A while ago I was talking with an acquaintance about his investments. He told me he had spent five years in a "very safe conservative fund" that
By Diego Alcalá · Tue Sep 01 2026 · investing
By Diego Alcalá
A while ago I was talking with an acquaintance about his investments. He told me he had spent five years in a "very safe conservative fund" that promised him stability and steady growth. When I asked what returns he had actually earned, the answer left me — to put it politely — stunned: after five years his capital had grown about 4% a year in a dollar-denominated fund, while over that same period Mexican CETES averaged close to 9%. That is a perfect example of what those of us in the industry call a zombie fund.
A zombie fund is an investment vehicle that technically keeps operating but has lost its economic reason for existing. Some insurers will not enjoy reading this, but here we are to ask uncomfortable questions. These are products that survive not because they create value for investors, but because they are a steady source of fees for whoever manages them. As Warren Buffett put it in the line I have quoted more than any other lately: "Only when the tide goes out do you discover who's been swimming naked." Zombie funds are exactly those naked swimmers, and rising interest rates pulled the tide out.
Where Zombie Funds Come From
They do not appear out of nowhere. They are the product of decades of an ecosystem where the incentives are badly aligned. Managers collect fees regardless of how the fund performs, which creates a dynamic where keeping a mediocre product alive is more profitable than closing it and returning the money.
The business model is simple: charge between 2% and 4% a year in management fees on assets that generate marginal returns. Take a fund holding the equivalent of 100 million pesos that earns 6% a year and charges 2.5% in fees. Investors are left with roughly 3.5%, while the manager collects 2.5 million pesos every year whether or not the fund adds anything.
This survives because many investors, especially conservative ones, confuse low volatility with real safety. A fund that barely moves in the short term feels stable. But if its net return after fees does not beat inflation, it is systematically erasing the investor's purchasing power.
The Three Warning Signs
Spotting a zombie fund means looking past the marketing and reading the cold numbers.
The first sign is returns that consistently lag equivalent passive alternatives. If a corporate debt fund earns less than a government bill after fees, you are looking at value destruction, not investing.
The second sign is opacity in the cost structure. Zombie funds tend to carry complex fee stacks: administration charges, management fees, entry and exit fees, and other buried costs that can add up to 4% a year. Add them all together and a fund advertising an 8% gross return may hand you barely 4% net.
The third sign is a strategy too simple to justify the price. Many conservative zombie funds hold an unsophisticated mix of government bonds and bank deposits that any individual investor could replicate directly. If the strategy is not complex enough to justify the fee, you are probably paying someone to do what you could do yourself.
Richard Thaler, the Nobel laureate in economics, sums it up: "the financial industry is very good at selling complicated products when simple ones would work better." Zombie funds are that dynamic in its purest form — needlessly complex products hiding weak performance behind technical language.
Why This Matters More When You Invest Across a Border
If you are Canadian, Mexican or any other foreign investor putting money to work in the United States, this problem gets one layer worse.
You are usually buying through an intermediary you did not grow up with, in a market whose fee conventions you do not know by instinct. At home you would sense when a charge is out of line. Abroad, you have no reference point, and "this is standard here" is very hard to argue with from another country.
Currency adds a second layer. A fund quoted in US dollars can look calm to someone whose expenses are in Canadian dollars or pesos, but the exchange rate is a real return, not a footnote. A conservative product that earns 3% net in dollars is not conservative for you if your currency moves more than that.
Distance also makes it easy to stop looking. The account statement arrives, nothing dramatic happens, and years pass. The whole danger of a zombie fund is that it never gives you a bad day — it just gives you a smaller decade.
Three Lessons
So why talk about zombie funds at all? Because they teach us what not to do with our money.
The first lesson: apparent safety is not the same as real preservation of capital. A product that does not lose money in nominal terms but does not protect it from inflation is, in real terms, a machine for destroying wealth in slow motion.
The second: the true cost of "safe" money. Many conservative investors assume high fees are the unavoidable price of peace of mind. That is a conceptual error. Genuinely conservative investments, such as direct government bonds, do not require active management fees, because there is no management to do.
The third: understand completely what you are invested in. Zombie funds thrive on the ignorance of investors who delegate every decision without asking the right questions. What exactly is the strategy? How are the fees justified? What does active management actually add?
I have noticed that investors who end up in zombie funds share a profile: they want the emotional comfort of "having an expert handle my money" more than they want returns. That bias is understandable, but be clear about what you are buying — you are paying for reassurance, not for performance.
What to Do Instead of Feeding Zombies
The good news is that avoiding them does not require becoming an investment expert or taking on unnecessary risk. For conservative profiles there are far more efficient alternatives with a better risk-return relationship.
Direct government bonds remain the cleanest option for conservative capital. They offer the same safety a zombie fund promises, without the management fee. If you want a little more yield, corporate bonds from solid companies can add 1-2% with limited risk.
For those who want diversification without excessive fees, fixed-income ETFs give exposure to broad baskets of bonds at costs that typically stay under 0.5% a year. The gap between paying 0.5% and 3% looks small on a single statement, but compounded over a decade it is a meaningful difference in final wealth.
The fundamental principle is this: in conservative investing, every unit of currency you pay in unnecessary fees is one less in your final capital. Since active management rarely adds value in efficient fixed-income markets, the smarter strategy is to minimize costs and maximize the net return you keep.
Intelligent diversification does not require complex products either. A combination of government bonds, quality corporate bonds and a small allocation to international assets can deliver the stability you want without feeding the industry's zombies.
Conservative zombie funds represent one of the worst kinds of value destruction in personal finance: slow, silent, and disguised as prudence. Recognizing them and staying away is a necessary skill for anyone trying to preserve and grow capital over the long term.
So let me ask you: have you recently checked the real net return on your conservative investments, or could you be feeding a financial zombie without knowing it?
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Read the Spanish version: Fondos zombis
This content is educational and informational. It is not investment, legal or tax advice. Every situation is different — talk to a professional before making decisions about your capital.