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Mutual Funds
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| | Mutual Funds
The 5 best fund families
These days it can pay to buy directly from fund families instead of going through a middleman like Charles Schwab. Here are the best.
By Timothy Middleton
With fund supermarkets jacking up their prices, investing directly with individual mutual fund companies is looking more and more attractive.
The reason is cost. In a low-return world, which weve been in for half a decade and will likely inhabit for years to come, the extra fees that supermarkets like Charles Schwab (SCH, news, msgs) slap onto funds are intolerable.
But which companies to invest with? I tapped Morningstar's database to compare fund complexes against each other. The data are clear in some instances, mostly in demonstrating vividly which companies to avoid.
Picking the winners is harder, and the bottom line is that no single complex offers the best of everything. Not surprisingly, the mega-complexes, Fidelity Investments, Vanguard Group and American Funds, come closest. They have the most assets -- nearly one-third of the industrys total -- because they offer the broadest array of top-flight portfolios.
But each has its weaknesses, and comparisons are further skewed by the industrys bifurcation into the load and no-load camps. Aside from some 401(k) plans, investors who buy funds from brokers have a very different set of choices than those who buy them directly. (Paying a load means paying a commission to a broker when buying or selling a fund. No-load funds don't charge brokerage commissions.)
Logistics aside, however, picking the right provider boosts the odds your portfolio will excel over a lifetime of investing. Here are my conclusions, and how I arrived at them.
The best of the best
For no-load investors- Domestic stock funds: Vanguard
- Foreign stock funds: Fidelity
- Municipal bond funds: Fidelity
- Taxable bond funds: Vanguard
For load investors- Domestic stock funds: American
- Foreign stock funds: American
- Municipal bond funds: Franklin/Templeton
- Taxable bond funds: Pimco
Morningstars data can be sorted to show the average performance of each fund category at each complex, as well as the percentage of the firms assets invested in each. Here are the Morningstar ratings for each of the 10 largest complexes.
| Morningstar ratings | | | Domestic stock | | Foreign stock | | Muni bonds | | Taxable bonds | | | | Rank | % assets* | Rank | % assets* | Rank | % assets* | Rank | % assets* | | Fidelity | 3.3 | 81.7 | 4 | 6.4 | 4.5 | 2.8 | 4 | 9.2 | | Vanguard | 3.9 | 69.9 | 3.7 | 5.9 | 4.3 | 6.6 | 4.3 | 17.6 | | American | 3.9 | 66.6 | 4.1 | 25.6 | 3.5 | 1.2 | 3.1 | 6.6 | | Franklin/Templeton | 3.7 | 38.8 | 4 | 29.8 | 3.5 | 23.3 | 3.2 | 8.1 | | JP Morgan | 2.8 | 50.6 | 2.8 | 9.2 | 3 | 21.5 | 3.1 | 18.7 | | Morgan Stanley | 2.9 | 52.4 | 3.8 | 23.6 | 3.5 | 4.3 | 3.5 | 19.7 | | Columbia | 3.1 | 63.8 | 2.9 | 7.1 | 3.3 | 10.7 | 3.3 | 18.4 | | Merrill Lynch | 3 | 51.7 | 3.3 | 24.7 | 3.4 | 7.7 | 2.8 | 16 | | Federated | 3 | 54.4 | 2 | 2.3 | 3.1 | 8 | 3.3 | 35.3 | | Pimco | n/a | n/a | n/a | n/a | 3.2 | 0.6 | 4.6 | 79.7 |
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*% of fund family's assets (excluding money market funds) in category
Note: n/a -- Not applicable; the equity funds managed under the Pimco brand are not managed by Newport Beach, Calif.-based Pacific Investment Management Co.
Source: Morningstar Inc.
Whats immediately apparent is that the funds offered by financial warehouses like JP Morgan Chase (JPM, news, msgs), Morgan Stanley (MWD, news, msgs) (formerly Dean Witter) and Merrill Lynch (MER, news, msgs) are mediocre. Morningstars ranking is based on a scale where 5 is best, 1 is worst and 3 is average.
Brokerage giants, banks and insurance companies dont feel any pressure to offer superior funds because their legions of brokers can sell anything. Eight of the 10 largest fund complexes are load families, but only three of them, American, Franklin/Templeton and Pimco, compete on the basis of performance.
Different paths
All no-load funds compete on performance, but they achieve their performance differently. Vanguard specializes in indexing, passively buying all the stocks in such benchmarks as the Standard & Poor's 500 ($INX). Without the cost of research and heavy trading, indexing drains off fewer performance points in expenses than active management, and Vanguard gives Fidelity a drubbing in domestic equity and taxable bond funds.
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But in the less-liquid markets for foreign stocks and municipal bonds, active management trumps indexing, because research into individual issues allows managers to pick winners and shun losers. With its vast research department, by far the largest in the industry, Fidelity is the clear winner here.
So, no-load investors have the best shot at building the best portfolio with at least two accounts. The customers of brokers, on the other hand, can keep everything under one umbrella, assuming they can strong-arm their broker into avoiding his or her firms lousy funds for the excellent independents.
Among these, nobody rivals Pimco at managing taxable bond portfolios. But Pimco caters mainly to institutions, which dont pay taxes and therefore ignore tax-free municipal bonds. Franklin/Templeton, a retail-oriented investment shop, offers a broad array of tax-free funds, and indeed they account for nearly a quarter of the firms assets.
On the equity side, the best load funds are Americans. This is a research-intensive firm with an unusual management structure, in which multiple individuals each manage only a piece of such funds as American Funds Investment Co. of America A (AIVSX) and American Funds EuroPacific (AEPGX). Thus they benefit from team management, but not group-think; team members make their own investment decisions for the slices they control.
The key to superiority
In all instances, these funds are so superior partly because their expenses are so low. The average domestic equity expense ratio at Vanguard is 0.26%, at Fidelity 0.71% and at American 0.77%. The average ratio at Franklin/Templetons muni funds is 0.68%, and at Pimcos taxable bond funds 0.67%. By contrast, Morgan Stanley charges an average of 1.39% for domestic equities, Columbia Funds charges 0.83% for muni bonds and Merrill Lynch charges 1.06% for taxable bonds.
Of course, there are scores of other mutual fund companies, and many have extremely attractive offerings. Look at the ranking of Dodge & Cox, a family I've praised frequently in this column.
| Dodge & Cox | | Domestic stock | | Foreign stock | | Muni bonds | | Taxable bonds | | | Rank | % assets | Rank | % assets | Rank | % assets | Rank | % assets | | 5 | 85.4 | 5 | 3.5 | n/a | n/a | 5 | 11.1 |
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Note: n/a -- Not applicable.
Source: Morningstar Inc.
The problem: Dodge & Cox is struggling with success, having seen its assets balloon to $65 billion, as of Sept. 30, from $26 billion only two years ago. So two of its four funds, Dodge & Cox Stock (DODGX) and Dodge & Cox Balanced (DODBX), are closed.
And consider T. Rowe Price (TROW, news, msgs), another complex with many outstanding funds.
| T. Rowe Price | | Domestic stock | | Foreign stock | | Muni bonds | | Taxable bonds | | | Rank | % assets | Rank | % assets | Rank | % assets | Rank | % assets | | 4 | 74 | 3 | 7.6 | 4.2 | 5.1 | 3.8 | 13.2 |
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Source: Morningstar Inc.
Its problem: A black hole where its international funds ought to be. T. Rowe Price International Stock (PRITX) hasnt ranked in the top half of its peer group in a decade, and this years gain of 9.1%, as of Nov. 17, lags the EAFE index, the basic measure of foreign-stock performance, by more than five percentage points.
This illustrates the Achilles' heel of investing with a single complex. I happen to have my principal retirement account with T. Rowe Price and am a shareholder of the international fund. But Im going through the bothersome process of cutting back this holding in favor of a better one in another account.
A once-great idea
This is why the supermarkets were such a great concept. I have accounts with Charles Schwab, a pioneer in the business of offering a huge number of funds from a variety of companies with no transaction fees. Schwab allows me to cherry-pick the finest individual funds, but . . .
Schwab charges fund companies 0.40% of the assets it holds for them annually to participate in its no-transaction-fee program. That is a mountain of money. It nearly doubles the 0.54% expense ratio of Dodge & Cox Stock, for example. Therefore, many of the best fund companies, including Dodge & Cox, Vanguard and T. Rowe Price, dont participate.
Since I shop for low-fee funds, I get hit with those fees almost every time. The last one for Dodge & Cox Stock, before it closed, was $97.90. That represented 0.41% of the value of the transaction, equal to a years worth of Schwabs high fee, but at least I only had to pay it once, not once a year.
So my newest accounts are with individual fund companies, notably Vanguard. In investing, what you pay for is what you dont get, so I strive to pay as little as possible.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Dodge & Cox Stock, T. Rowe Price International Stock. He is also the author of a book about the founder of Pimco: "The Bond King: Investment Secrets from Pimcos Bill Gross."
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