Are Your Mutual Funds Making the Grade? Check the Scoreboard!

I’m going to blow the whistle on the investment newsletter business today.

What I’m about to say may ruffle the feathers of some editors, analysts and publishers. Perhaps I’ll even receive an email or phone call about it.

But, I don’t mind dealing with any repercussions because I’m speaking the truth.

Since I made the switch to this business three years ago, widespread negative comments about "mutual funds" have bothered me. Comments like:

Mutual funds are roach motels.

Kick mutual funds to the curb.

Fire your mutual fund manager — now!

Your mutual fund is swindling you.

Don’t spend another week letting your retirement languish in a mutual fund.

Actively managed mutual funds are not a good place to park your money.

You’re much better off just putting your money in an S&P 500 Index fund than trusting your money to a fund manager.

Americans are losing up to 70% of their nest egg to mutual fund fees.

There’s more where that came from, too. But, you get the point.

To be just, a few newsletters will occasionally admit there might be a handful of good mutual funds to choose from, out of the near-10,000 in existence.

However, the majority of investment newsletters love to trash mutual funds.

C’mon Now …

These generalities are telling a fib.

I spent 15 years working on that side of the investment business. So, I should know.

Among other securities, I dealt with my share of mutual funds in prior jobs. I ran a trading desk for a large discount brokerage firm … worked with an elite team of traders for Charles Schwab … and served as the main day-to-day portfolio manager and lead research analyst for a billion-dollar wealth manager …

Plus, I’ve attended dozens of industry conferences, met with hundreds of folks from the fund business (partners, portfolio managers, analysts, wholesalers, etc.) and evaluated thousands of mutual funds over the years.

I also invest in mutual funds myself. (And I recently gave my publisher Brad Hoppmann two gold mutual fund ideas to share with his Afternoon Edition readers.)

Point is, I have a real-life understanding of the mutual fund business.

Now, do the majority of mutual funds underperform their benchmarks?

Yes. It’s around 70% to 80%, on average.

But, simple math reveals there are plenty of mutual funds that beat their index, too.

Beating its benchmark: The Tocqueville Gold Fund is up an annualized 9.9% vs. the Philadelphia Gold & Silver Index’s annualized 1.9% over the past 18 years.

So, when someone casts the wide net and says "avoid all mutual funds," I have to object.

After all, if every actively managed mutual fund underperformed its benchmark, there would be no mutual fund business. Or at least, it would be a much smaller business. Right now, there’s $15 trillion in assets in U.S. mutual funds.

Mutual fund haters like to talk about fees, fees, fees. But, in reality, it comes down to what mutual funds are delivering.

Scoreboard, baby!

And finding out what mutual funds are delivering — including fees — couldn’t be simpler …

Just look at the scoreboard!

The scoreboard — or listed mutual fund performance — is reported "net."

By "net," I mean "net of fees."

Mutual fund families and financial websites (i.e., Morningstar, Lipper, Yahoo! Finance, etc.) report mutual fund performance net of fees.

So, if you want to know how a fund has done over the last three years, five years or 10 years, look at the net returns.

Yes, you’ll also want to factor in the portfolio manager’s or management team’s tenure when looking at those returns.

And sure, look at the fees. But make sure you look at the net returns.

If you don’t see value, which can be measured by risk as well as return, move on.

Sure, low-cost solutions (index funds and ETFs) make a ton of sense. But, sprinkling in some good actively-managed mutual funds — ones that you’re willing to hold long term — makes sense, as well.

If you’re worried about costs still, pairing active managers with low-cost solutions (index funds and ETFs) will bring your overall costs down.

It’s hard to go wrong with the Vanguards, T. Rowe Prices and Fidelitys of the world. But there are lots of solid mutual fund families beyond the big dogs.

10 Lesser-known Shops I Like (more of the equity-focused variety) …

Artisan Partners. Skilled coverage of the global equity universe. Plus, a newer high-yield fund that should post impressive three-year performance next March. 12 of 14 funds (86%) have outperformed their benchmark since inception.

Diamond Hill Capital Management. Small Ohio-based firm with long-term expertise in long-only equities, fixed income and alternatives. 11 of 12 funds (92%) have outperformed their benchmark since inception.

Dodge & Cox. First fund introduced in 1965. And you don’t have to pay up for quality active management — average expense ratio of six fund offerings is 0.56%. All six funds (100%) have outperformed their benchmark since inception.

Gabelli Funds. They have over 25 mutual funds in their line-up. If you zero in on the four flagship funds Mario Gabelli manages, they’ve all beaten their benchmark handily since inception. The "Super Mario"-led funds are Gabelli ABC Fund, Gabelli Asset Fund, Gabelli Small Cap Growth Fund and TETON Westwood Mighty Mites Fund.

Tocqueville. This contrarian team looks outside the mainstream consensus for undervalued companies with long-term earnings power. Tocqueville is rooted in the independent thinking of 19th-century chronicler of American democracy Alexis de Tocqueville. The Tocqueville Gold Fund is a standout. (From 6/30/98 to 11/30/16, it’s up an annualized 9.9% vs. the Philadelphia Gold & Silver Index’s annualized 1.9%.)

Matthews Asia. A good place to go if you’re interested in the long-term growth of Asia. Matthews is the largest dedicated Asia-only investment specialist in the United States. 16 of 18 funds (89%) have outperformed their benchmark since inception.

Oakmark Funds. Bill Nygren (U.S. stocks) and David Herro (international stocks) are two of the best portfolio managers in the business. 7 of 7 funds (100%) have outperformed their benchmark since inception.

Queens Road Funds. Benjamin Graham and David Dodd-style value investing from long-term practitioners. Just two funds, but both have outperformed their benchmark since inception.

Touchstone Investments. Touchstone hires institutional money managers to run its mutual funds. These managers have superior long-term performance track records in hedge funds or separate accounts. And access to these high-caliber managers isn’t that expensive — each has a lower expense tag than their peer group average.

Tweedy, Browne Company LLC. This firm’s 95-year history proves that sticking with buying undervalued securities works. Benjamin Graham was one of the firm’s primary clients from the 1930s to 1950s. 3 of 4 funds (75%) have outperformed their benchmark since inception.

And yes, any above-referenced performance (mostly outperformance) is "net of fees."

I only listed 10 of my favorite under-the radar mutual-fund families. There are many others outside of the "big box" fund companies. If you’d like to share some of your favorites, please comment right here.

In the future, if anyone tells you to ignore all mutual funds, you should ignore them.

And don’t forget to check the scoreboard!

Grant Wasylik

Your thoughts on “Are Your Mutual Funds Making the Grade? Check the Scoreboard!”

  1. Nice list of mutual fund families to consider. I have been pleased with Catalyst Funds. Specifically the MLP and Infrastructure Fund and the Catalyst Hedged Futures Strategy Fund.

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Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…