Many mutual fund investors pay a lot of money to active managers who invest their cash. Lately, they don't seem to be getting much for it.
The average
What that money does is hire well-paid experts to buy and sell equities. Index mutual funds and
If ever, 2008 was the year when managed funds should have earned the extra dough with superior performance. Yet most didn't deliver. The math is pretty simple from there: If you're paying the manager more and getting the same or lower performance, you end up with less money.
For all the effort . . .
It's tough to fathom why active managers don't deliver, given their huge advantages.These fund managers supposedly spend their days analyzing and researching overall economic conditions, market action and individual stocks. Many employ squads of analysts to assist them in those tasks. Further, because they generate huge trading commissions, mutual fund managers are privy to inside information that you and I never see.
Active mutual fund managers have the flexibility to adjust their portfolios to current conditions. They can dump weak stocks for stronger ones. If need be, they can go to cash. Index mutual funds and ETFs, on the other hand, track a fixed list with little flexibility. If an index falls off a cliff, they follow.
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Unfortunately, as a group, mutual fund managers seem to squander their advantages. In 2008, the market, as measured by the S&P 500 Index ($INX), dropped 39%. For the most part, managed funds did about the same or slightly worse.
No one likes spending money for nothing. So I went looking through Morningstar's premium fund screener to find a few worth the extra fees.
Large-cap growth funds
Because the S&P 500 tracks mostly large-cap growth companies, I started by checking the returns of similar managed funds. That is, large-cap growth funds, using Morningstar's definition, with at least 95% of their portfolio in U.S.-based stocks. (Growth stocks are those expected to grow earnings and sales faster than the overall economy.)I excluded funds specializing in particular sectors or industries such as health care or energy.
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Since I was evaluating funds in general, not "buy" candidates, I included load as well as no-load funds, funds closed to new investors and funds available only to big institutional investors. I excluded funds that were essentially duplicates but carried different ticker symbols, such as BlackRock Focus Growth B (MBFOX), which is nearly identical to BlackRock Focus Growth A (MDFOX).
The 163 large-cap managed growth funds that I found dropped 40%, on average, in 2008. By contrast, the iShares S&P 500 Growth Index ETF (IVW), which tracks the 50% of stocks in the S&P 500 with the highest book values, averaged a 35% loss. Only 19 of the 161 managed funds beat the Growth Index ETF.
None of the large-cap managed growth funds managed a positive return. The top performing funds were Monetta Young Investor (MYIFX), down 27% for the year, and Evergreen Omega A (EKOAX), down 28%.
Continued: Large-cap value funds
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