Managed a 10% return last year? Not good enough – the S&P returned 12%!
Beating the market is all the rage these days (and has always been at Wall Street). Take the ad for any actively managed mutual fund, the benchmark is not whether the fund made money for you, but whether they beat the S&P 500! Of course, fund managers use sophisticated algorithms to try to beat the market and make up for the effort by charging hefty fees.
So if a fund is charging above average fees, common sense dictates its performance should be above average as well, right?
I want to highlight some of these super expensive funds that charge a pretty penny for their superior performance. For this little experiment, I’ve chosen 3 funds,
- that have at least been around for the past 12 years,
- are top performers in the large cap category and
- have high fees.
All 3 funds are compared against Vanguard’s S&P 500 fund VFINX, rather than the absolute index, for an apples-to-apples comparison.
1. Pacific Advisors Large Cap Value A (PAGTX)
The objective of PAGTX is long term capital appreciation. 80% of its assets are from the S&P 500 based on an actively managed, value based approach for long term capital appreciation.
This fund has an expense ratio that is more than twice the industry average at a whopping 3.05%. In addition, there is a front end load of 5.75%, which means you when you purchase this fund, you pay a one time fee of 5.75% of your investment. This is in addition to the recurring fee of 3.05% every year. What about 12b-1 fees? You bet! 0.24%. 12b-1 fees are ‘administrative fees’, fund companies charge.
A 10 year projection for a $10,000 investment in this fund comes to a whopping $5280 just in fees!
And to put that 3.05% expense ratio into perspective, consider this – the average annual return of the S&P 500 from 1999 – 2010 was -0.50% after adjusting for inflation!
So for this hefty premium, what does the investor get in return? From 1999-2010, this fund has managed to beat the S&P 500 just 4 times averaging a return of just 0.4% vs S&P (VFINX)’s 3.9%!
2. Performance Large Cap Equity B (PFEBX)
This fund managed by Douglas Ralston, seeks long capital appreciation and invests 80% of its assets in the largest of firms from the S&P 500.
PFEBX has an expense ratio of 2.01% higher than the industry average of 1.12%, a deferred sales load of 5%, i.e., you pay when you sell as opposed to a front end load where you pay when you buy. There is also a 12b-1 fee of 1%.
This fund has managed to beat the S&P 500 just 4 times from 1999-2010.
Its best return during that period was an 18.85% return in 2003 against VFINX’s 28.5%.
Note: This fund no longer exists (it did when I started preparing this post). This has been consolidated with Federated Funds as of September 21, 2012.
3. Sparrow Growth A (SGFFX)
This fund seeks long term capital appreciation based on a proprietary trading model developed by its advisors. SGFFX invests in both domestic and foreign securities and may invest upto 15% of its assets in investment grade fixed income funds.
This fund has an expense ratio of 2.28% and a front end load of 5.75%. 12-1b fees are capped at 0.50%. A 10 year expense projection per $10,000 comes to $3368 in fees.
This fund has managed to beat the S&P 500 6 times with an average return of 2.63% for the period 1999-2010.
It’s worst return was in 2008 when it lost 46.26% of its value (as opposed to S&P’s 37.02%).
This Stellar Fund Beat The Market 9 Times Since 1999!
Finally, I have this fund that has managed to beat the S&P 500 index 9 times since 1999 and has an annualized return of 8.45% since inception. This is also one of my favorite funds.
Objective, Fees & Returns
Here’s how this fund compares to the above three funds mentioned above.
|Average Return since '99||0.40%||0.51%||2.63%||5.07%|
|Beaten S&P 500 since '99||4 times||4 times||6 times||9 times|
The projected expense is no typo! That’s just $230 for 10 years and this fund beats the most expensive funds out there including the S&P 500 (3.93 vs 5.07) for the same period.
Would you like to know the fund manager and the fund’s objective? Actually both are irrelevant! This is a passive fund, no secret sauce to the returns, and the objective, well just to hold almost all the stocks in the market!
Yes, this is the total stock market index fund from Vanguard (VTSMX). This represents the entire stock market. Why pick and choose when you can own everything!
Go over that statistics once again. Better returns, negligible costs and best of all, simplicity. None of the funds comes even close to the returns posted by VTSMX.
When it comes to investing, you have no control over future performance, but you do have control over expenses. Pick funds with low fees. Fees matter.
So why do people chase expensive, actively managed funds when they could just choose a low cost index fund alternative?
Buffett said it best:
There seems to be some perverse human characteristic that likes to make easy things difficult.
Photo credit: Lisa Solonynko