The largest mutual funds often generate the most publicity and recognition among investors. But what if you found smaller funds that delivered better returns, were made of the best stock picks, held less risk and lower expenses?
Would you buy them?
That’s a question many people don’t often consider because people don’t know realize the choices they have between huge funds and their less-known counterparts in the same fund category.
Here are four examples:
Large Blend Category
Big Fund –Vanguard Total Stock Market (VTSMX)
Assets under management: $150 billion
Expense ratio: 0.18%
To the credit of this fund, Vanguard has created its own basket of large caps that has performed better than the broader market, at a 1-year return of about 17% — that tops both the S&P and the Dow for the period. The fund also carries Vanguard’s low-fee trademark with an expense ratio of 0.18%. The Fund employs a “passive management” approach designed to track the performance of the MSCI US Broad Market Index. As of Nov. 30, 2010, its top holdings were Exxon Mobil (NYSE: XOM), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), IBM (NYSE:IBM), and Proctor & Gamble (NYSE: PG).
Smaller Fund — Parnassas Fund (PRBLX)
Assets under management: $11 billion
Expense ratio: 0.10%
PRBLX invests at least 75% of total assets in equity securities that pay interest or dividends, and the remaining 25% in non-dividend-paying equity securities, fixed-income securities and money-market instruments. Parnassus’ investment twist is that it screens for socially responsible criteria and looks for “politically progressive behavior as it relates to the environment, the workplace, and business ethics. They also eschew makers of alcohol, tobacco and weapons; companies involved with gambling; and nuclear power.” So now you can get large-cap, multinational company exposure from companies which demonstrate positive behaviors. As of Nov. 30, 2010, it shared the same top holdings as the Vanguard fund.
Large Growth Category
Big Fund — Fidelity Contra Fund (FCNTX)
Assets under management: $75.5 billion
Expense ratio: 1.01%
The Contra Fund has huge name recognition in the fund world and assets under management to match. In its history, the fund has even become a victim of its own success. In 2006, the fund grew so quickly that it was forced to close to new investors. But as the economy weakened, shareholder redemptions and a reduction in assets under management trimmed the fund’s size and made it more nimble. In late 2008, Fidelity decided to reopen the fund to new investors after returns suffered during the economic downturn. One reason for the fund’s lackluster performance during this period was its size. The fund could not take advantage of any opportunistic buying it identified during that period, which made it difficult to make short-term corrections. However, over its history, the fund has performed well as assets increased. The fund has returned 4.34% over the past five years and 5.48% over the past decade.
Smaller Fund — Brown Advisory Growth Equity Fund (BIAGX)
Assets under management: $149 million
Expense ratio: 1%
Hardly a household name, this is a fund which still trolls among large-cap growth stocks for opportunities. BIAGX is a no-load fund with an admirable 1% expense ratio. Morningstar gives the fund an over five-star ranking and lists it as “average” in risk over the three-, five- and 10-year periods. Its top holdings are Apple, Google, Qualcomm (NASDAQ: QCOM), Allergan (NYSE: AGN) and Covance (NYSE: CVD). Morningstar also ranks the fund in the single digits for its fund class in the one-, three-, and five-year periods.
Moderate Allocation Category
Big Fund — American Funds Income Fund of America (AMECX)
Assets under management: $67 billion
Load: 5.75%
Aside from this fund’s eye-popping 5.75% load, its performance in the three- and five-year timeframes has slipped significantly into the 43% and 66% percentiles, respectively. A scant five years ago, the fund ranked in the top 5% of its peers. The fund invests primarily in income-producing securities, such as dividend-paying common stocks and interest-paying bonds. It normally invests at least 60% of assets in common stocks and other equity-type securities. The fund may also invest up to 25% in non-U.S. assets.
Smaller Fund — Tributary Balanced Fund (FOBAX)
Assets under management: $35.8 million
Expense ratio: 1.37%
This is a team-managed, diversified fund which had 66% of the portfolio in stocks and 29% bonds, and underweight in non-U.S. stocks compared to the category and the benchmark. The fund allocates assets among stocks, fixed income securities and cash equivalents. It invests 25% to 75% of assets in stocks and convertible securities and at least 25% of total assets in fixed income securities. The fund may also invest in preferred stocks and warrants
Large Growth Category
Big Fund — Growth Fund of America (AGTHX)
Assets under management: $162 billion
Load: 5.75%
An article from the Jan. 3, 2011 issue of Fiduciary News asks: “How could such a high cost/poor performing fund like the Growth Fund of America sit as the most widely held 401k mutual fund?” That’s a great question and the answer lies in the lucrative revenue-sharing deals this fund company offers advisers and the 5.75% load. Lipper gave this fund a “D” 1-year rating and a “C” 5-year rating. One financial adviser, Roger Wohlner, said the “Growth Fund has not done well over the past several years, but has a solid longer-term track record.” Morningstar puts the fund at the 80% rank for one year, at the 62% rank for three years and in the 62% rank for five years. This may be why some say this fund’s glory days are over. But as long as this fund pays 401(k) plan administrators and financial professionals to buy the fund, it could sadly remain the most widely held mutual fund in 401(k) plans to years to come, even if the fund is detrimental to the plans’ own participants.
Smaller Fund — Boston Trust Equity (BTEFX)
Assets under management: $60 million
Expense ratio: 1%
This is a little fund which is in distinct contrast to the Growth Fund of America. It carries an overall five-star ranking from Morningstar, and a five star overall return rank. The fund also has been below the category average for expenses from 2006 through 2010. Its sales charges, loads, and redemption charges are all 0%. Its most recent top holdings were Exxon Mobil, Emerson Electric (NYSE: EMR), Precision Cast Parts (NYSE: PCP), EMC (NYSE: EMC), and T. Rowe Price (NASDAQ: TROW).
