I wrote this article on March 19th, 2012 for my Golden Valley Patch Blog.
As I have written in this space previously, I read a great deal of financial news and analysis on a weekly basis. I must admit that even I was shocked to read the results of an important mutual fund study that were announced earlier this week.
In 2011, about 84 percent of all actively managed U.S. stock mutual funds underperformed the S&P 500 index that represents their corresponding stock market segment.
That means that for every possible mutual fund option in your Minnesota company retirement plan menu, you had about a 16% chance of “beating the market” in 2011.
I am defining “beating the market” as getting an annual investment return in 2011 that was above the benchmark index of the company retirement plan mutual fund that you owned last year.
The mutual funds analyzed in this study are defined as actively managed. An actively managed mutual fund is professionally managed by a team of investment managers.
The annual fees on managed mutual funds are always higher than the fees on mutual funds that is designed to track a stock market index. The annual fees to own an actively managed mutual fund are around 2%. The annual fees to own an index mutual fund are around .10%.
The widely accepted investment management theory is that professional mutual funds managers can more than make up for their higher annual management fees versus a cheaper index mutual fund. For that reason, most financial advisors recommend actively managed mutual funds to their clients.
That is also the reason that actively managed mutual funds dominate the default menu of mutual fund options in company retirement plans.
However, more and more research is showing that there are fewer and fewer examples of mutual fund managers that can justify their higher annual investment management fees by providing better than the stock market averages investment returns.
Over the last three years ended in 2011, about 56 percent of stock mutual funds underperformed relative to their S&P benchmarks. Over the last five years ended in 2011, 61 percent underperformed.
Over the last ten years of this same study, the average percentage of mutual funds that underperformed was about 57%.
Also in 2011, the study found that 96 percent of all Large Cap Growth mutual funds underperformed their S&P benchmark last year. As you may or may not know, the vast majority of the mutual fund options in any company retirement plan menu are Large Cap mutual funds.
The target term mutual funds that have taken over many company retirement plan menus over the last few years are mostly made up of Large Cap Growth mutual funds.
All these numbers add up to the fact that a Minnesota company retirement plan participant had very little chance of making significant investment return progress last year owning the majority of the mutual fund options on their company retirement plan menu.
Ric Lager
Lager & Company, Inc.
