Our annual mutual fund guide provides information and performance statistics on 727 funds.
NOTES & OPINIONS
Members weigh in on our broker comparison. Plus, a member shares his thoughts on how far the individual investor has come, as we begin the AAII Journal’s 40th anniversary celebration and look back.
Despite Changes, Challenges for Fund Investors Continue
As we were preparing this year’s mutual fund guide and continuing to celebrate the AAII Journal’s 40th anniversary, I looked at our first mutual fund guide. It was published in August 1982, a few years after we launched the AAII Journal. The first guide’s introduction discussed the challenges facing individual investors.
“While examining investment alternatives, especially for those with limited capital available, we were struck by the difficulties involved in surveying no-load mutual funds. Because of their very nature, they are not heavily advertised. Although information is readily available, one needs to consult a variety of resources, and ultimately each fund, to compile the information we provide herein.”
Today, it is considerably easier to find information on mutual funds. All fund companies make the data available on their website, as opposed to requiring investors to call or write and then wait for the fact sheets and prospectuses to be sent through the mail. Brokerage firms and some financial websites make data about mutual funds available as well.
What is often still not so easy to find is a comprehensive listing allowing you to compare a fund to a sizable group of its peers. We’ve been doing this for 37 years. We are continuing to consider ways to improve how we provide mutual fund data.
Another thing that has changed since the publication of our first guide is the comparative size of passive funds. The Vanguard Index Trust—started by John Bogle, who died at age 89 a week before we sent this issue to the printer—was among the 151 funds included in our first guide. This S&P 500 index fund held $91.2 million in assets under management (AUM) at the end of 1981. Though not the smallest equity fund in the guide, it was dwarfed back then by the Fidelity Puritan fund (FPURX) with $663.8 million in AUM, T. Rowe Price Growth (PRGFX) with $919.2 million in AUM and Vanguard Windsor (VWNDX) with $928.4 million in AUM.
Today, AUM for those three actively managed funds are $25.4 billion, $47.0 billion and $16.8 billion respectively. The Vanguard Index Trust, which is now known as the Vanguard 500 Index fund (VFIAX), had $400.6 billion in AUM as of December 31, 2018.
As its size has grown, its expense ratio has shrunk. VFIAX, which is the Admiral Shares class of the fund, charges just 0.04%. (The original Investor Shares class is now closed to most investors.) This is down from the December 1981 expense ratio of 0.42%.
Index funds have grown in popularity because of both their consistent performance relative to their benchmarks and their lower total costs. Most actively managed funds underperform their benchmarks over the long term, especially once costs are factored in.
Though costs are typically thought of in terms of expense ratios, the lack of tax efficiency is also a cost. Many mutual fund investors found this out the hard way last year. As we mentioned in our year-end Tax Guide (December 2018 AAII Journal), 2018 was a bad year for mutual fund distributions. CapGainsValet counted 469 funds with estimated distributions of between 10% and 19% of assets, 50 with estimated distributions of between 20% and 29% and 19 with distributions of at least 30% as of December 10. These distributions are taxable even if the fund lost money and/or an investor never sold shares. This serves as a good reminder to look at the tax-cost ratio column when reviewing funds in our guide.
There are other considerations when selecting a fund. Personal allocation preferences should top the list. Figure out your long-term portfolio strategy first and then select the funds best for it instead of merely trying to build a portfolio of the best-performing funds. In doing so, consider your financial and psychological ability to stick with a fund. The risk index can help with this. Also look at how the fund compares with its category and style peers over a period of several years. Take into account not only the most recent performance but also the relative performance over the last three-, five- and 10-year periods as well as the bull and bear market returns (if available). Portfolio size and turnover are also important considerations; more concentrated portfolios may be prone to bigger price moves and more differentiated returns, while higher turnover implies a greater willingness on the part of the manager to speculate than to invest.
Charles Rotblut, CFA
Editor, AAII Journal