Are actively managed mutual funds getting less expensive? The answer appears to be yes, they are. Over the past several years, passive managed mutual funds and Exchange Traded Funds have stolen away billions from the active funds. Why? People realize that when they pay higher fees, they need higher returns to be the market or index that the fund is compared to. This was solved to a degree by index funds that have extremely low fees and are designed to match the market return without having to beat it. If you need help selecting funds to invest in seek out the assistance of a Registered Financial Consultant to assist you.
How Fees Work
Fees are the bane of the mutual fund industry. They are charged by every fund, but they are not created equally. As alluded to earlier, the index funds have much lower fees and in actuality lower transaction costs and taxes as they tend not to trade much unless the index they track changes. That is not generally the case with an actively managed fund as they tend to trade more and thereby create more taxable events and increase the fees associated with the fund. And for every percentage point the fund costs you, it means it must beat the index it tracks by at least that much to make it worth owning. And that is a feat few funds can match much less maintain for an extended period. This means if the fund charges 2.5% and the index’s return is 9% to make money the fund will need an overall return of 11.5%. Yes, it is hard for an actively managed fund to match the market and much harder yet for it to beat it after you consider the fees. Compared to a passive fund that charges .5% or less matching the market return becomes much more achievable.
Where Fees are Headed
With the advent of the passively managed index funds and the subsequent inflow of money into the funds, actively managed funds have had to adapt and change their fee structures. To compete with passive funds, we have seen some basic types of funds lower their fees substantially in recent years. Take a large capital equity fund that was actively managed in 2004 with fees of approximately 0.92% and fast forward to 2019 that same fund charges about 0.65% or almost 0.3% cheaper. And the only real change is people are flocking to passively managed funds. Despite this fact actively managed funds are still popular and have their place in an investment portfolio provided you utilize them in a correct manner. Last year, about a third of these funds did match or beat the index they tracked. The lone real exception is the actively managed bond funds, which regularly outperform index bond funds.
Last year, funds in the lowest quartile of Morningstar’s list of funds earned an average of 9.4%, while those in the highest quartile only had a return of about 4.5%. This means what was alluded to earlier that the more expensive the fund is, the less likely it is to beat the index it tracks. So to beat the market, look for lower-priced mutual funds to utilize, and here is a partial list from an article I recently read for you to consider. But as with any investment do your research to ensure that the fund will fit into your portfolio and meet your investment needs.
Inexpensive Funds to Consider
Vanguard Wellington (VWELX) is an actively managed fund that is comprised of about two-thirds equities and a third bond. This fund has been around since 1929 and has an impressive return of almost 12% a year as compared to the index of about 10%. And this fund is inexpensive to own at just 0.25% in fees. Well worth your consideration.
American Funds American Balanced (BALFX) is a fund by the American Group that was designed after Vanguard’s Wellington fund. This fund is about 60% equities and 40% bonds with a slightly higher fee expense of 0.65%. And like the Wellington fund, this one has outperformed its index by almost 2% a year for the last decade.
Rowe Price Equity Income (PRFDX) is an income-driven fund that invests in dividend-paying equities and is a consistent performer when it comes to the index it tracks. Due to its low turnover there are few taxable events outside the dividends, and it has a solid and tenured management team in place. And it too has a low 0.65% fee.
Rowe Price US Small-Cap Growth Equity (PRDSX) is a fund that is useful for diversification as it invests in much harder to find and follow small-cap equities. Because of this simple fact, the funds in this category tend to be on the more expensive side due to the amount of work it takes to not only find the equity but to maintain its advantage inside the fund’s performance. This fund was founded in 1997 and has an amazingly low fee of just 0.79%, while most small-cap funds charge well over 1%, and it has a solid performance history since its conception.
While I do not know your individual needs or expectations, these four funds are worth consideration for use in a portfolio. With low fees and a solid track record they deserve a look. But as always, you must remember that past performance does not indicate what the future performance will or might be.
For more information, feel free to contact me directly or leave a message here. And if you need assistance, reach out to a Certified Financial Consultant in your area.
