Mutual funds with managers who choose securities instead of following an index – supposed actively managed funds – seem to have minimal to no ability to stay ahead of the competition, even for periods as short as five years. Less sizable investors may be better off investing with an index fund with low annual expenses instead of an actively managed one with higher fees. A measly two out of 703 domestically attentive stock funds stayed in the top 25% of performers for the 60-month period ending in September, reported by a study. Don’t even think about investing in those top two funds.
The T. Rowe Price New Horizons Fund is closed to new investors, meaning those who aren’t already invested in it can’t begin now. In eight of the 13 sub-categories, no funds stayed in the top 25% of performers following five years. Next, inertly managed funds are those that track an index of stocks such as the S&P500. Horack favors the Valley Forge, Pennsylvania -based Vanguard stable of index funds, which was founded by investing legend Jack Bogle.
Because of the known benefits of lower expenses, Horack advises that her clients invest 90 percent of their funds in index-type products. Only when her clients have more investing knowledge and a bigger threshold for the potential risks of losing money does she talk about actively managed funds.
Is there any space for actively managed funds? “Actively managed funds have a role at specific times, in certain places, and right now that is bonds,” states Rebecca Kennedy, a Denver-based financial planner and principal at Kennedy Financial Planning. Kennedy states being a main player in the bond market can be an advantage, so it can make sense to opt for an actively managed fund.
She favors three institutions for such funds: Los Angeles-based Metropolitan West Asset Management, which is part of the TCW Group; San Francisco-based Dodge & Cox Funds; and Pimco in Newport Beach, California. She stays clear of exchange-traded index funds because she wants portfolios that her clients can implement themselves.