There are some underperforming mutual funds that investors should consider running far away from in May this year. While it may be tempting to hold onto these funds in hopes of a turnaround, it’s essential to recognize when a fund consistently fails to meet expectations and delivers subpar returns compared to its peers and benchmark indices.
When considering alternatives to underperforming mutual funds, investors should also be aware that passively managed exchange-traded funds (ETFs) have historically outperformed actively managed mutual funds. This is because the prevailing financial theory is that no risk-adjusted returns are possible because the market prices stocks efficiently, which has proven true over long periods of time.
Some of these mutual funds also have high expense ratios, which may also eat into one’s returns. Investors should therefore consider fleeing from these underperforming funds as one could get better returns elsewhere.
ClearBridge Sustainability Leaders Fund (LCILX)
ClearBridge Sustainability Leaders Fund Class IS (NASDAQ:LCILX) focuses on sustainable investments but has underperformed recently. The fund tracks the Russell 3000 TR Index and lags behind the broader indices.
The fund has assets totaling $117.31 million and carries an expense ratio of 0.75%. Its turnover rate is 41%, with a trailing twelve-month dividend of 0.18, yielding 0.69%. The dividend has grown by 105.71%, and it is paid out annually.
The fund’s top holdings include Microsoft (NASDAQ:MSFT), which constitutes 8.28% of the portfolio with 24,350 shares. Apple (NASDAQ:AAPL) follows, making up 4.34% with 31,340 shares. JPMorgan (NYSE:JPM) represents 4.06% of the fund with 25,090 shares.
ESG investing generally has been a poor performer for investors across the board, and the high expense ratio and turnover suggests that there are better opportunities for investors.
Fidelity Magellan (FMAGX)
Fidelity Magellan (NASDAQ:FMAGX) is a well-known fund that has struggled with poor returns over long periods.
The fund has assets totaling $32.18 billion and an expense ratio of 0.47%. It has no minimum investment requirement and a turnover rate of 86%. The fund offers a trailing twelve-month dividend of 0.62, yielding 4.35%, although its dividend growth has decreased by 53.83%. Dividends are paid semi-annually.
Additionally, since its inception, FMAGX has maintained a solid track record, boasting an average annual return of 5.94% when factoring in dividends. However, this lags behind even simple ETFs such as the Vanguard S&P 500 ETF (NYSEARCA:VOO) that has delivered a five-year return of 86.71%.
Even if FMAGX’s returns were identical to VOO, it would still lag behind VOO over the long run due to the higher expense ratio. It being actively managed is also a risk factor that may not be offset through higher returns in the long-run.
MFS Massachusetts Investors Growth Stock Fund (MIGFX)
The MFS Massachusetts Investors Growth Stock Fund (NASDAQ:MIGFX) has lagged behind its peers. The advisor prioritizes investing in stocks of companies believed to have above-average earnings growth potential compared to others, focusing on growth companies.
The fund holds assets totaling $12.04 billion and has an expense ratio of 0.71%. It requires a minimum investment of $1,000 and has a turnover rate of 20.00%. The fund offers a trailing twelve-month dividend of 1.62, yielding 3.73%, with a dividend growth rate of 9.12%. Dividends are paid semi-annually.
MIGFX achieved a total return of 27.01% over the past year. However, since its inception, the fund has maintained an average annual return of 2.33%, including dividends. This is far below that of VOO and the S&P 500. It should be noted that its returns when adjusted for inflation will be far less than this, and is another reason it’s one of those mutual funds for investors to steer clear of.
American Funds Washington Mutual Investors Fund (AWSHX)
The American Funds Washington Mutual Investors Fund (NASDAQ:AWSHX) has faced challenges, affecting its performance.
The fund primarily invests in common stocks of established companies that are either listed on the New York Stock Exchange or meet its financial listing requirements, focusing on those with a strong record of earnings and dividends. The advisor aims to maintain a fully invested, diversified portfolio.
AWSHX achieved a total return of 24.78% over the past year. Since the fund’s inception, it has maintained an average annual return of 5.13%, including dividends. The fund holds assets totaling $173.95 billion, with an expense ratio of 0.57%. The minimum investment is $250.
MIGFX invests primarily in big tech, but has an assortment of dividend stocks included too, leading to a dividend yield of 3.73%. However, its blend of attempting to balance growth and capital appreciation leads to subpar performance, even when its very hefty expense ratio of 0.71% is not included.
Franklin Income Fund (FKINX)
Franklin Income Fund (NASDAQ:FKINX) is known for income generation but has not met expectations.
The fund invests in a diversified portfolio of debt and equity securities, primarily common stocks for equity and a variety of fixed, floating, and variable rate instruments for debt. Worryingly, it may allocate up to 100% of its total assets to debt securities rated below investment grade.
FKINX achieved a total return of 10.17% over the past year. Since its inception, the fund has maintained an average annual return of 0.29%, including dividends.
The fund holds assets totaling $71.27 billion, with an expense ratio of 0.61%. The minimum investment is $1,000, and the turnover rate is 56.23%. It offers a trailing twelve-month dividend of 0.14, yielding 5.79%, with a dividend growth rate of 9.64%. Dividends are paid monthly.
FKINX underlines the issue of chasing high dividends: namely that immediate income comes at the expense of capital appreciation and often total return. Averaging a return of 0.29% is well below the average rate of inflation.
T. Rowe Price Growth Stock Fund (PRGFX)
T. Rowe Price Growth Stock Fund (NASDAQ:PRGFX) has struggled to keep up with market returns. The investment seeks long-term capital growth through investments in stocks. The fund will normally invest at least 80% of its net assets (including any borrowings for investment purposes) in the common stocks of a diversified group of growth companies.
PRGFX had a total return of 37.25% in the past year. Since the fund’s inception, the average annual return has been 4.92%, including dividends. The fund holds assets totaling $47.12 billion, with an expense ratio of 0.65%. It has no minimum investment requirement and a turnover rate of 28.90%. The fund offers a trailing twelve-month dividend of 2.89, yielding 2.92%.
The existence of mutual funds like PRGFX, as well as hedge funds for the wealthiest, don’t make much sense to me if investors seek capital appreciation and total return. PRGFX’s expense ratio is over 21 times higher than VOO’s, and both aim to invest in large growth companies.
The expense ratio is a critical component, as it compounds with one’s total investment as it grows. One could easily fork out a six-figure sum in exchange for relative market underperformance for some mutual funds, which begs the question as to why an investor wouldn’t question their options beforehand.
Vanguard Equity-Income Fund (VEIPX)
Vanguard Equity-Income Fund (NASDAQ:VEIPX) targets large-value companies but has struggled to deliver adequate returns.
The fund invests mainly in common stocks of mid-size and large companies that typically pay above-average levels of dividend income and are considered undervalued relative to similar stocks by the purchasing advisor.
VEIPX had a total return of 20.17% in the past year. Since its inception, the fund has maintained an average annual return of 4.11%, including dividends. The fund holds assets totaling $55 billion, with an expense ratio of 0.27%. The minimum investment required is $3,000, and the turnover rate is 48%. It offers a trailing twelve-month dividend of 1.17, yielding 2.72%.
I think VEIPX underlines the general failure of funds attempting to balance capital growth and income coupled with an actively-managed strategy. Investors pay high fees, and don’t receive adequate amounts of either.
If one seeks capital growth, one can invest in cheaper ETFs that have historically performed better and purchase better-performing income-generating assets such as dividend stocks or ETFs. Both of these options can be exercised at a lower cost than what VEIPX offers.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
