Recommendations and name recognition can be a good thing when you’re looking for a new restaurant. It makes sense to ask a friend or family member you know that has similar taste to yours. A well-known name brand might also generally be a sure bet too.
But when it comes to your investments, a friend’s referral, though surely well intentioned, can have less than spectacular results. And then there is brand recognition. Most investors know how the “big names” in investing, i.e. the Merrill Lynch and the Morgan Stanley’s etc. are the “big names” not because of the quality of their investment advice but because of the amount they spend on marketing and advertising.
On the other hand, experienced financial advisors understand that good investments should fulfill specific criteria (and being a “name brand” is not one of them): They should have
- High return relative to the level of risk
- Low expense ratio or costs
- Historical evidence of long-term performance
- Asset manager’s investment philosophy or expertise relevant to the asset class
Rating the Mutual Fund Families
Cogent Research LLC, conducts a survey once a year of financial advisors from across the U.S. as to which mutual fund families best meet their investing criteria. This year, 1700 financial advisors were asked to give their opinion of 24 different mutual fund companies. The average or mean score of all responses was 27 though the actual respondents’ results ranged from 1 to 45.
Top Fund Family in 2013
For the third time in four years, the best rated mutual fund family according to financial advisors is Dimensional Fund Advisors (DFA) with a score of 45. DFA’s equities management style is a low cost, passive investing approach in that it is not trying to beat the market through individual stock selection but instead structuring the portfolios toward factors such as company size and valuation to capture better returns over time.
It would be a good bet that you have never heard of DFA. One reason may be that DFA does not advertise to retail investors, unlike Vanguard, Fidelity, Schwab and many others. Additionally, DFA investment offerings are only available to investors through approved Registered Investment Advisors that have completed additional required training.
According to DFA, the management believes that “qualified advisors can play a vital role in helping people pursue their financial and investment goals. These professionals educate clients on the financial science that drives our investment approach, offer guidance and expertise to construct a properly diversified portfolio, and encourage the discipline essential to long-term investment success.”
A good example is when the market starts going down, many investors get nervous and they want is to “sell, sell, sell”. This causes a problem for the mutual fund manager who then has to go ahead and sell holdings to make cash available for the liquidations. This often triggers capital gains for those that remain in the fund and adds transaction costs, which are a drag on the funds’ performance. Using a qualified advisor often stops illogical buying and selling decisions and often results in better returns.
Second Place Fund Family
Pacific Investment Management Co. LLC (PIMCO), placed second with a score of 36. PIMCO is perhaps best known for their bond fund offerings but are making in roads into equity funds as well.
The largest bond fund in the world is the $251 billion Pimco Total Return Fund, which has dropped more than $41 billion, or 14 percent of its assets, in the four months ending in September through a combination of losses and investor withdrawals.
Bill Gross is a founder of the firm. Mohamed El-Erian of Harvard Endowment fame is CEO, and both serve as Co-Chief Investment Officers. PIMCO is an Active management house (tries to beat the market) rather than using the passive approach of DFA or the third place finishers’ approach of some passive funds and some active funds.
Third Place Fund Family
The Vanguard Group Inc., which is the world’s largest mutual fund company, finished third with a score of 33. Vanguard is best known for its low cost index fund investment approach including their S&P 500 offerings, but has actively managed fund options as well such as Vanguard Wellington.
Vanguard is unique in that it is “not for-profit company” as opposed to most financial services companies that are for profit.
Unlike PIMCO, none of Vanguards or DFA’s investment options have commissions associated with acquiring the funds, which is a big plus!
There are many great investments from other mutual fund families but if you are an individual investor, you would be well served to understand the following about your mutual funds.
- Fund costs (and hopefully there are no commissions)
- Risk-metrics (Alpha and Sharpe Ratio)
- Historic performance compared to the peer group
- Perhaps understand why your fund family is not be so well rated as the above