Size doesn’t matter, at least not with mutual funds. In fact, smaller can be better for most fund types.
This is because some of the biggest mutual funds are also some of the worst performers. And often the larger relative size, in terms of assets under management compared to category averages, is a major contributing factor to sub-par performance.
We’ve covered the problems associated with asset bloat in mutual funds before. What can happen is that returns for stock funds can shrink lower and lower as AUM goes higher and higher.
Asset bloat is especially a problem with actively managed funds because their expenses are typically higher than index funds, and higher AUM forces the manager to add more holdings, which eventually makes them look like an index fund while the expenses drag on performance.
With that backdrop, we give you three of the biggest mutual funds that aren’t worth the fees.
Biggest Mutual Funds Not Worth the Fees: Pimco Total Return (PTTAX)
Sales Charge: 3.75%
Expenses: 0.85%, or $85 for every $10,000 invested
Minimum Initial Investment: $1,000
Although the front-load and expenses aren’t above-average for similar bond funds, the performance for Pimco Total Return (PTTAX) doesn’t justify the fees.
In the short run, some actively managed bond funds can outperform the Barclays Aggregate Bond Index, but a hefty size and fees higher than a comparable index fund will drag on returns.
The assets for PTTAX grew to nosebleed levels when Bill Gross was at the helm and pulling in benchmark-busting performance. But the larger size contributed to growing challenges for even a bond king to manage.
Total AUM for Pimco’s flagship fund are now around $94 billion and returns for PTTAX are behind the aggregate bond index for year-to-date, one-year, three-year and five-year returns. The expenses are higher (and returns lower) for other share classes of the Total Return fund, such as B-share class (PTTCX), which has expenses of 1.6% and a level-load of 1%.
Biggest Mutual Funds Not Worth the Fees: Royce Premier (RPRCX)
Sales Charge: 1%
Minimum Initial Investment: $2,000
Royce Funds is an unfortunate and prime example of a mutual fund company that has suffered from the one-two punch of bloated assets and high fees, and Royce Premier (RPRCX) is a prime example.
Royce Funds was arguably the best fund shop for small-cap stocks in the 1990s and early 2000s. I recommended many of their funds to clients during that time frame. But once Legg Mason (LM) acquired Royce Funds in 2001, I recall seeing assets growing and performance declining as a result.
Today Royce Premier is still large with $3.5 billion in AUM, which is about three times larger than I recommend for small-cap stock funds. In more recent history, the fund has performed consistently worse than 90% of small-cap growth stock funds in the past five years.
Although the Royce Funds offers cheaper share classes of their Premier fund, I highlight RPRCX because it is a C-share fund with a level load of 1%. The Royce Premier Investor (RYPRX) share class does not charge the 1% fee and has a more reasonable expense ratio of 1.1%.
If you have a broker and they recommend C-share funds, find a different broker or go it alone!
Biggest Mutual Funds Not Worth the Fees: American Funds Bond Fund of America (ABNDX)
Sales Charge: 3.75%
Minimum Initial Investment: $250
Without consistently stellar management and low expenses, the biggest funds can’t beat index funds in the long run and American Funds Bond Fund of America (ABNDX) is a large case in point.
Total assets across all share classes of Bond Fund of America are $28.3 billion, which is astronomical and problematic for an actively managed fund. By comparison, Vanguard Total Bond Market Index (VBMFX) has almost $148 billion in assets but it’s passively managed and tracks the Barclays Aggregate Bond Index.
Looking at performance, ABNDX loses to the index in the one-, three-, five-, 10-, and 15-year returns.
Furthermore, the holdings for ABNDX average out to be intermediate-term bonds with an A credit rating. This type of bond fund fills the space of a core holding, which is the same for VBMFX.
Why not just hold a bond index fund?
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VBMFX for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.