How The Largest Actively Managed Mutual Funds From 15 years Ago Performed

You can't go long without reading an article about the death of active management. Somewhere in a discussion like that you will also hear that the larger a fund gets the more likely it is to under-perform. My purpose of this post is not to get into either of those issues but I thought it would be interesting to take a glimpse back in time to the largest funds of 1999 (15 years ago).

For this exercise I decided to screen for the largest actively managed funds 15 years ago (8/1999) which had the S&P 500 as their prospectus benchmark. The top 10 results looked like this

So how did they do? Were they too big to outperform?

Indeed, the largest fund did manage to under-perform. However, as a whole, these large funds did quite well. Over the last 15 years the largest 10 funds which were benchmarked to the S&P 500 managed to return an average of 5.47% compared to 4.47% for the S&P 500.

What's also interesting is that despite the fact that I compared them all to their prospectus benchmark of the S&P 500, a few of them tend to have a known growth tilt (Vanguard Primecap, Growth Fund of America, Fidelty Contrafund) but they all managed to significantly beat the S&P 500 despite the fact that growth significantly underperformed the S&P during this time (Russell 1000 Growth returned only 3.18% compared to 4.47% on the S&P 500).

Test Makers Fail Financial Literacy Test

So news was recently going around about a Financial Literacy Test made by the OECD. The Wall Street Journal provided 5 sample questions from the test and I must say that the OECD fails it's own question.

First of all I'm switching the "zeds" to $ for typing purposes. So Mrs Jones current loan balance is $7400, it has a 15% interest rate with monthly payments of $150. This means that the loan will take 78 payments (months) to payoff and TOTAL INTEREST paid over the life of the loan will be $4,178 (yes below it equals $4,180 due to rounding).

However, if she decides to take out a new larger loan of $10,000 at an interest rate of 13% while repaying at the same $150 rate then it will take 119 payments (months) to payoff and TOTAL INTEREST paid over the life of the loan will be $7,832. In other words she will be paying $3,654 MORE INTEREST.

Despite these facts OECD says the answer is as follows

Clearly A, as I showed earlier, is not correct. Therefore C is also wrong. While she is paying a lower interest RATE, she is clearly paying HIGHER INTEREST in total ($7,832 vs $4,178). B is in fact correct, she will have more money available but she will be paying interest on that money and unless she has an investment that is going to earn her more then the cost of funds (13%) she would be better off taking a smaller loan.

Why am I not surprised that the OECD would come up with this clearly incorrect answer regarding interest paid? Because they seem to encourage over-leveraged economies at every opportunity, so here they are teaching incorrect information, helping everyone become slaves to debt through bad information.

Many Government Bonds Yielding Less Than United States

I can't listen to a talking head, bond manager, strategist or seemingly anyone without hearing about how "Rates can only go higher from here". When in reality THEY CAN go lower! In fact, when you look around the world, on a relative basis, THEY SHOULD!

Look at that list and tell me the United States should pay more on their debt then all those countries. France is borrowing at 1.77% people, FRANCE! You have Japan borrowing at a rate 76% lower than the US with more than twice the debt. Now all this doesn't mean the united states SHOULD trade lower, but it's either that or others SHOULD trade higher because on a relative basis, much is out-of-whack. And those calling for much higher rates in the U.S should realize that basket cases like Italy and Spain are trading at 3.1%!

Interestingly enough, despite the relative attractiveness of US rates you have nearly EVERY "unconstrained" bond fund avoiding US duration risk at all costs, meanwhile loading up on risky credit. How often is the herd correct?

A Look At Sloppy Nonsensical Mutual Fund / ETF Analysis

I read a lot of stuff online so I should be used to sloppy-stupid nonsensical things written online. However, this one titled "Why ETFs Are Better than Mutual Funds, in Two Charts" hits it on every base of stupidity. Now usually ETF Database is a decent source of some good information but clearly the editors were asleep at the wheel on this one. Let the article speak for itself.

It starts off fine enough

"Though some may disagree, exchange-traded funds have certainly proved their worth over the years. With more than 1,500 products to choose from, more and more investors have turned to the ETF wrapper, embracing the vehicles’ low-costs, efficiency, and many other advantages."

All is good there. And so she continues

"Some investors and industry professionals, however, have not yet come to embrace these products, preferring mutual funds instead. For those who need some convincing, we’ll try to show you why ETFs are better than mutual funds, in two charts."

Great, let's see it.

"For this exercise, we take a look at the popular Emerging Markets ETF (VWO, A), comparing it to the GS Emerging Markets Equity Fund (GEMCX). First, a comparison of expenses:"

Whoa Whoa, wait a second, WHAT? First of all what made her decide to use Goldman Sachs Emerging Markets Fund? Furthermore, why would she use a C share? The fund also comes in other share classes including IR share class which comes in at 1.48% (we will also overlook the small fact that net expense ratios for those funds are 0.15% and 2.47% not what she has listed). The only people who might be using a C share are people working with an adviser and the advisers fee is being included into the expense ratio (but that is a discussion for another day). This is nowhere NEAR an apples to apples comparison showing why ETFs are better than Mutual Funds.

She goes on to point out the performance gap that this inevitably leads to 

And she concludes:

The Bottom Line

This is just one of many examples of how ETFs are often better than mutual funds. Not only are exchange-traded funds usually cheaper, but they are often more efficient than mutual funds. If we’ve managed to convince you, use our free Mutual Fund to ETF Converter Tool to find an alternative to your current mutual fund.

Sorry, you have not managed to convince me and hopefully you didn't convince anybody with your ridiculous comparison. I hope your "converter tool" has a little more logic then is displayed here. So what is a PROPER comparison of the ETF VWO if you are trying to see the difference between mutual fund and ETF structures? Well the very simple and logical comparison would be Vanguard's Emerging Markets ETF (VWO) to Vanguard's Emerging Market Index Mutual Fund (VEMAX).

Only problem is that when you show a REAL comparison, your point is pretty much lost . As you can see, looking at the complete common period between the two funds, there return is essentially identical.

Not only does a proper comparison make her performance point invalid, her point about cost is as well, as both carry an expense ratio of 0.15%. But just for giggles lets throw in Vanguard's Active version of emerging markets which is a little more expensive with an expense ratio of 0.94%. Unfortunately, their active emerging markets strategy hasn't been around as long (A little shy of 3 years) but as you can see it has managed to handily outperform. You may also notice that over this timeframe the index MUTUAL FUND slightly outperformed the supposedly superior ETF.