We contend that part of the underperformance of an actively managed fund stems from its expense ratio. While the average large-cap core mutual fund has a 1.1% expense ratio, there are many funds with lower costs. Since expense ratios eat into investor returns, choosing strong performing funds that cost less increases the likelihood of consistent gains.
For example, Vanguard Growth & Income Fund (VQNPX), a CFRA five-star fund, outperformed its large-cap core peers for the seventh straight year. VNQPX has a below-average standard deviation and incurs a modest 0.34% net expense ratio. Many fund holdings, including Johnson & Johnson (JNJ) and JP Morgan Chase (JPM) are viewed by CFRA as being both attractive and of high quality. Year to date through June 13, the fund is modestly lagging its peers.
T Rowe Price Dividend Growth (PRDGX), another CFRA five-star fund, outperformed its large-cap core peers for three consecutive years, aided by its low 0.64% expense ratio; year to date the fund is ahead of its peers. However, PRDGX underperformed this same group in 2012 and 2013, highlighting the challenges of ignoring funds that lag their peers. Here too appealing holdings, including Comcast (CMCSA) and PepsiCo (PEP), help the fund’s ranking.
While the S&P Dow Jones Indices data is not favorable toward active mutual funds, we believe investors can either find funds with a combination of strong attributes or join the trend to low-cost passive investing.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.