Mutual fund challenges
With the Dow up over 13% year to date and the S&P over 11%, mutual funds are in many cases looking at a pretty big miss of their benchmarks. Large cap mutual funds that should be compared to these indexes are challenged. A few examples:
Marsico Focus Fund -- ytd return of 3.5% and it has a 1.25% expense ratio
Goldman Sachs Capital Growth -- ytd 7.33% with a 1.49% expense ratio
Neuberger Berman Century Fund -- ytd 6.7% with a 1.47% expense ratio
These are big misses in the works for funds that investors pay well for their "expertise". And the shortfall is not just limited to those who charge a lot. A few more examples of funds whose expense ratios are in the 60 - 80 basis point range:
Fidelity Magellan --ytd 5.15%
Fidelity Contra -- ytd 9.87%
Janus Growth and Income -- ytd 6.8%
Janus Fund -- ytd 8.62%
In fact, any U.S. large cap fund that beats its index by any amount will easily be in the top 25% of mutual funds for the year. This is not at all good for the fund industry, with ETF's indexing the various large cap markets at expense ratios from 12 to 40 basis points, and some firms, Fidelity is an example, offering select index funds at a 10 basis points(.10%) expense ratio. It's difficult to make an argument for the discretionary fund manager's value when the performance is lower and the cost for their work is higher, at times much higher.
Why has this happened? Indexes have not usually outperformed in recent years. To be fair to the seven funds that I listed, Marsico and Fidelity Contra have outperformed indexes consistently over the prior three years and Janus Growth and Income has kept pace. The other four have not. But why has this year been a fund manager's headache. A few reasons:
---Large cap technology has not bailed them out. The Nasdaq 100 is up just 7.5%.
---There have not been big liquid industry groups that have stayed consistently strong.
---Two big industry groups that helped carry the market for the three previous years, energy and real estate, have been sideways to down.
---And importantly, how many managers were willing to be bet that in the face of a slowdown in residential real estate, really high gasoline prices, and rising interest rates that the consumer would hang in there so well. It may well be right to be cautious, but for those who live by calendars being right next year doesn't help much.
The mutual fund industry is being squeezed by indexes and ETF's on one side and by hedge funds on the other. For what they offer in general they deserve to be rationalized. But there will still be great mutual funds that do well most of time, and when they don't the investor has been given the information to know exactly what the fund's mandate is and why they have chosen the fund. As an example there's the Dodge and Cox Stock Fund, up almost 16% with a 52 basis point expense ratio, and with a clear large cap value, low turnover approach.
Marsico Focus Fund -- ytd return of 3.5% and it has a 1.25% expense ratio
Goldman Sachs Capital Growth -- ytd 7.33% with a 1.49% expense ratio
Neuberger Berman Century Fund -- ytd 6.7% with a 1.47% expense ratio
These are big misses in the works for funds that investors pay well for their "expertise". And the shortfall is not just limited to those who charge a lot. A few more examples of funds whose expense ratios are in the 60 - 80 basis point range:
Fidelity Magellan --ytd 5.15%
Fidelity Contra -- ytd 9.87%
Janus Growth and Income -- ytd 6.8%
Janus Fund -- ytd 8.62%
In fact, any U.S. large cap fund that beats its index by any amount will easily be in the top 25% of mutual funds for the year. This is not at all good for the fund industry, with ETF's indexing the various large cap markets at expense ratios from 12 to 40 basis points, and some firms, Fidelity is an example, offering select index funds at a 10 basis points(.10%) expense ratio. It's difficult to make an argument for the discretionary fund manager's value when the performance is lower and the cost for their work is higher, at times much higher.
Why has this happened? Indexes have not usually outperformed in recent years. To be fair to the seven funds that I listed, Marsico and Fidelity Contra have outperformed indexes consistently over the prior three years and Janus Growth and Income has kept pace. The other four have not. But why has this year been a fund manager's headache. A few reasons:
---Large cap technology has not bailed them out. The Nasdaq 100 is up just 7.5%.
---There have not been big liquid industry groups that have stayed consistently strong.
---Two big industry groups that helped carry the market for the three previous years, energy and real estate, have been sideways to down.
---And importantly, how many managers were willing to be bet that in the face of a slowdown in residential real estate, really high gasoline prices, and rising interest rates that the consumer would hang in there so well. It may well be right to be cautious, but for those who live by calendars being right next year doesn't help much.
The mutual fund industry is being squeezed by indexes and ETF's on one side and by hedge funds on the other. For what they offer in general they deserve to be rationalized. But there will still be great mutual funds that do well most of time, and when they don't the investor has been given the information to know exactly what the fund's mandate is and why they have chosen the fund. As an example there's the Dodge and Cox Stock Fund, up almost 16% with a 52 basis point expense ratio, and with a clear large cap value, low turnover approach.
posted by John Borden at 8:49 PM
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