Be careful which investment group you choose; some fall short.
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Fame and fortune don't always go hand in hand.
When we took a hard look at some of the big-name fund families, we found that some didn't necessarily live up to their promise. Yet their reputations and advertising attract millions of investors.
Some fund families' offerings were mediocre, either in diversity or performance. Other groups provided a better selection, or more of their funds brought in top returns. Take stock mutual funds, for example. Some investment companies had funds that beat one or more benchmark indexes; other companies had none.
You can cherry pick funds from different investment houses, of course. But keeping the bulk of your holdings within one fund family offers advantages. "It's easier to shift assets within one company than across companies," says Rebecca Cohen, a spokesperson for The Vanguard Group, in Valley Forge, PA. "By consolidating all of your assets at a single investment company, you'll also have fewer statements and tax documents to contend with." True, you could get one statement by buying through a mutual fund supermarket, such as Charles Schwab & Co. But you'll probably pay a fee, which you'd avoid by buying directly from the fund company.
Keeping the money with one family could also get you discounts or extra services. For instance, says Cohen, "If you invest all your assets with Vanguard, you may qualify for our Admiral shares program, which includes 52 Vanguard funds with reduced expenses for those who invest a large amount and stay with us long term." Other fund families have similar programs.
Which group deserves your money? Fund performance is the key factor in that decision, but you also want to see if the selection in each asset class (large-cap, small-cap, international, etc.) allows you to build a diverse portfolio. Expenses and loads count, too, because they eat into your profits.
We scrutinized five well-known fund familiesFidelity Investments, Janus, Scudder Investments, T. Rowe Price Group, and The Vanguard Groupto see how they stacked up. We considered only funds sold directly to individual consumers, not those exclusively for institutional investors or available only through financial advisers. And we focused on equity funds, because their returns vary more widely among fund families than bond and money-market fund returns. For a quick company comparison, see the chart below.
The nation's largest mutual fund company, Fidelity has 81 investor centers in the US, about $1.33 trillion in assets under management, and 165 funds available to individual investors. But more impressive than its size is its record for dependable performance in many investment groupings. In the mid-cap growth, large-cap growth, and health care categories, to name a few, Fidelity has funds whose three-year annualized returns beat the category averages.*
The Boston-based company has an impressive array of equity funds covering almost every strategy and asset class. In addition to a variety of diversified domestic stock funds, Fidelity's roster includes 41 industry or sector fundsthe de rigueur health care and technology portfolios, as well as funds focused on chemicals, leisure, pharmaceuticals, electronics, financial services, and other areas. The company also offers 17 international funds and four index funds.
Two technology fundsSelect Electronics Portfolio and Select Software and Computer Services Portfoliorank within the top 10 out of 101 technology vehicles tracked by Morningstar, the fund analysis company, based on three-year annualized return.
Fidelity also has "funds of funds" for folks who don't have the time or patience to choose multiple investments themselves. For example, the Four-in-One Index Fund puts assets into Fidelity's US Bond Index Fund, Spartan Total Market Index Fund, Spartan Extended Market Index Fund, and Spartan International Index Fund. And each of the company's four Asset Manager funds includes stock, bond, and money-market funds in varying proportions to create different risk levels. Buying one of these funds gives you a diversified portfolio. Moreover, Fidelity's online discount brokerage service allows you to buy over 4,400 mutual funds from Fidelity and other families.
This fund family has made itself a household name, and its reputation is well deserved.
Based in Denver, this relatively small 33-year-old company offers just 22 mutual funds. But several have become so popular that Janus is now in a pickle: Eight of its 18 equity fundsincluding Janus Worldwide Fund, once a top performer, and Janus Fund, the company's flagship offeringhave closed to new investors. Janus Fund alone has almost $24 billion in assets.
Of the 10 stock funds still open, four Janus Fund 2, and the Janus Strategic Value, Orion, and Global Value fundsare relative newbies. They debuted during the market decline, so investing now would require a leap of faith. Other funds, such as Janus Special Situations and Janus Enterprise, have pedestrian returns.
Janus still offers some good choices, though, particularly among large-company funds. For instance, Janus Core Equity, a large-cap equity income vehicle, has outperformed its benchmark, the Wilshire Large Cap 750 Index, over one, three, and five years. Janus Growth and Income Fund has beaten the Russell Top 200 Growth Index over one, three, five, and 10 years.
If you already own shares in Janus' closed funds, you can still add money and feel comfortable sticking with them. Or you might select one or two strong Janus portfolios to complement your other investments.
But if you want to assemble a diversified portfolio of funds from the same family, Janus simply doesn't offer enough choice.
This New York company is an amalgam of the former Scudder, Stevens & Clark, and Zurich Kemper Investments, and its $345 billion in assets are now under the aegis of Zurich Scudder Investments. Separately, Scudder and Kemper were investment innovators. But the combined entity may not live up to its promise. Its 47 equity mutual funds include a couple of standouts, several Johnny-come-latelies, and many drones. About half of the funds have a 5.75 or 5.0 percent up-front load, which means they must outperform the competition just to deliver equal profits. Scudder also has the highest fund expenses of the five investment companies we looked at.
Large-cap funds constitute Scudder's biggest asset class. Of its 15 such funds, only the Scudder-Dreman High Return Equity shows up in the top 10 percent of large-cap funds when ranked by 3-year-annualized return.
Of Scudder's 10 international funds, only four broke above the top 20 percent based on one-year return and only two did based on three-year return. Just one sector fund is worth mentioningScudder Technology, which ranked in the top 30 percent of technology funds based on three-year annualized return. Less noteworthy sector vehicles include Scudder-Dreman Financial Services Fund, which ranks in the top 67 percent of financial funds, and Scudder Health Care Fund, which falls in the top 43 percent in its sector.
The bottom line: You can do as well or better elsewhere, at lower cost.
A granddaddy of investment management companies, this Baltimore-based firm offers individual investors 73 mutual funds.
T. Rowe Price has strong equity fund contenders in almost every asset class. For example, all four of the small-cap funds that are available to individual investorsNew Horizons, T. Rowe Price Diversified Small Cap Growth, Small-Cap Value, and Small-Cap Stock fundsbeat their benchmarks based on one- and three-year returns. (New Horizons buys companies whose growth is accelerating due to new management, new products, or major economic changes; T. Rowe Price Small-Cap Stock combines growth and value stocks.)
The company's mid-cap category contains five funds, including the T. Rowe Price Mid-Cap Value Fund, which receives Morningstar's top rating, five stars. Its large-cap funds cover several distinct strategies, including Dividend Growth Fund and Tax-Efficient Growth Fund. Four large-cap funds are in the top 15 percent of their categories based on three-year return. In the international arena T. Rowe Price also covers the map, with general funds such as T. Rowe Price International Equity Index and focused ones like the T. Rowe Price Latin America Fund, which falls in the top 2 percent of foreign funds based on three-year annualized return. Nine of the 12 international funds have been around for five or more years.
T. Rowe Price offers portfolios in the technology, financial, real estate, and natural resources sectors, too. The Financial Services Fund ranked in the top 16th percentile of financial funds and the Health Sciences Fund lands in the top 50th percentile in its sector based on three-year return.
In general, T. Rowe Price shines by breadth of offerings and overall fund performances.
The company's philosophy is also compatible with nervous investors; managers are willing to give up some potential gains if the risk appears to outweigh the reward.
With 85 funds available to individual investors, strong performance, and the industry's lowest average expense ratios, this company's unique offerings can satisfy manybut not allinvestors.
The company's founder, John Bogle, pioneered the low-cost index fund based on his belief that most people are content with a return that matches the market. Many Vanguard funds follow an indexsay, the S&P 500 Stock Index or the Russell 2000 Index. The manager buys a representative sampling of companies from the index and doesn't vary the portfolio unless the index changes. That way, the fund generally can't underperform the market it tracks. Moreover, each fund requires minimal attention, which keeps expenses down.
Vanguard has left almost no index uncovered. It's got the 26-year-old Vanguard 500 Index Fund, the Extended Market Index Fund (which includes more than 5,000 small- to medium-size companies), the Value Index Fund, the International Growth Index Fund, and about 20 others.
The one thorn: When an index tanks, so do the index funds tied to it. Only actively managed funds have the potential to outperform. Vanguard has several actively managed funds, including Vanguard Windsor and Vanguard Capital Opportunity. With one- and three-year annualized returns of 2.4 percent and 11.0 percent, respectively, Vanguard Windsor significantly beat both the S&P 500 and the Russell Top 200 Value Index. Vanguard Capital Opportunity beat the S&P 500 based on three- and five-year returns.
If you favor asset allocation vehicles, you may appreciate Vanguard's four LifeStrategy funds. Each invests in a portfolio of the company's index funds, asset allocation funds, and bond funds, and is geared toward income, conservative growth, moderate growth, or growth.
Overall, Vanguard's low costs and diversity are compelling lures for investors who can be content with pacing the market.
*All performance figures are through Feb. 28, 2002.
|Assets under management (billions)||Number of stock funds||Front-end sales load||Expense ratio*|
|Fidelity||$1,330||115||3.0% on about half the funds 0% on the rest||0.99%|
|Scudder Investments||345||47||5.75% or 5.0% on many funds 0% on others||1.28|
|The Vanguard Group||580||51||None||0.34|
*Includes only stock funds offered directly to individual investors.
Sources: fund companies; Morningstar
Leslie Kane. How 5 top mutual fund families stack up. Medical Economics 2002;8:84.