Don’t Bet on The “Best.”

Posted on February 14, 2013
Filed Under 401K, Fidelity Funds, Investment Strategy, Mutual Funds, Personal Investing, Select Funds

The cover story of Barron’s February 11, 2013 issue is “The Best Fund Families of 2012.” To be blunt, it’s a ridiculous attempt at helping investors choose mutual funds.

There is plenty of text, but like most people I first turned to the chart which ranked the largest 62 mutual fund families.  I wanted to see how Fidelity fared.

Fidelity ranked 8th out of 62 for the performance of its “U.S. Equity” mutual funds (the largest category in the study, by assets). Eight is not bad at all. But then I dug down into the details of how the rankings were achieved and I realized those Fidelity mutual funds should have been ranked much higher.

A shaded box in the article explains the convoluted methodology Barron’s used for the ranking.  In part, it says…

 “Each fund’s returns are adjusted for 12b-1 fees, which are used for marketing and distribution expenses.  The funds usually add these fees back into the returns. Our aim is to measure the manager’s skill. Fund loads, or sales charges, aren’t included in the calculation of returns, either.”

What?!

In layman’s terms, the mutual fund returns are not, in many cases, real world returns.  Several of the fund families that ranked above the Fidelity mutual funds have higher fees or fund expenses than Fidelity funds.

For example, Putnam funds were ranked #1 overall and 4th for performance of their U.S. Equity funds. So I took a look at their Putnam Growth Opportunities Fund. Here’s what I found on the Putnam website.

Annualized total return performance* as of December 31, 2012

Class A shares inception 10/02/1995

Before
sales charge

After
sales charge

Russell 1000 Growth Index†

1 year

17.71%

10.92%

15.26%

(Full details of the fund and its sales charges can be found here: https://prodinfo.putnam.com/prodinfoapp/application/pricing.jsf )

As you clearly see, this fund has a massive sales charge. Using Barron’s methodology, the fund returned 17.71% last year. But a real world investor would have pocketed only 10.92%.

All the Fidelity mutual funds we use are “pure no-load” funds. There is no sales charge.

Aside from those deficiencies, how useful are these rankings? Well, as this quote from the story indicates – not very:  “Only one firm in this year’s top 10 … was in last year’s top 10.”

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