Daily Gains Letter

Why You Should Consider Ditching Your Mutual Fund Manager

By for Daily Gains Letter | Apr 10, 2013

















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More proof has been released that suggests some retirees are better off handling their own wealth management strategies. According to a recent survey, individual investors who paid a mutual fund manager over the last decade would have done better by taking the reins themselves and investing in a passive index fund at a much lower cost. (Source: Pratt, J., “Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index,” NerdWallet, March 27, 2013.)

The survey examined more than 24,000 mutual funds and exchange-traded funds (ETFs) available to U.S. investors for a 10-year period ended December 31, 2012. At the end of 2012, investors had invested more than $7.0 trillion in the 23,000-plus actively managed mutual funds and ETFs. Investors placed just $2.5 trillion in passive funds.

Of those who paid to have their funds managed, only 24% of active fund managers beat the market over the past 10 years. During that time frame, actively managed mutual funds returned just 6.5%, while the passively managed index products averaged 7.3%.

The return statistics for actively managed funds is probably even lower than the reported 6.5%, because the study does not include information on those funds that closed during the 10-year period.

Still, is it really possible that 76% of active fund managers wasted their money getting their Master of Business Administration (MBA) degrees, yet they are no better at finding winning indices than retail investors? This is where it gets fun. There’s even more compelling evidence to consider if you’re waffling between using an actively managed index and doing your own due diligence.

It turns out that a large number of actively managed mutual funds do, in fact, beat the market, but the winnings aren’t passed onto the clients due to higher fees.

To be fair to active managers, there is more to investing than wealth creation. Risk and wealth management are also important. And it’s in these areas that active managers come out on top—marginally—with a volatility of return at 14.1% per year versus 16.1% per year for passive managers.

So what’s the best wealth management strategy for investors? Is it a passive or active index fund? It all comes down to the risk-to-reward ratio. If you’re younger and OK with a little volatility, a passive index fund made up of smaller stocks may be in your cards. If you’re risk-averse, you may feel a pull toward the low-risk, low-return large-cap world of actively managed index funds.

Over the 10-year stretch, mid-sized companies delivered the strongest gains, beating out small-cap and large-cap funds. And growth stocks outperformed value stocks.

With that in mind, here are two mid-cap ETFs that have been running in step with the markets:

The iShares Morningstar Mid Core Index (NYSEArca/JKG) tracks the Morningstar Mid Core Index and contains 185 different companies that have exhibited average growth and value characteristics. The index has more than $185 billion under management and is up 11% year-to-date and just under 14% year-over-year.

The ProShares Ultra MidCap400 (NYSEArca/MVV) seeks daily investment results that correspond to two-times the daily performance of the S&P MidCap400. The index has over $141 million under management and is up 21.2% year-to-date and 25.3% year-over-year.

So where should investors turn? If you’re just going by the statistics, then most are better off on their own with passive index funds that concentrate on blended mid-cap stocks. If only wealth management were that black and white.

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