Take a Look at the Numbers: With Stock Funds, Big Isn’t Always Bad
Too big is too bad in the mutual fund business--or so Fidelity Investments would have us believe, given its decision last week to limit the flow of new money into its flagship Magellan stock fund.
After years of criticism that the now $63-billion-asset Magellan had grown too large to manage--criticism that seemed justified by Magellan’s particularly poor relative performance in 1996--Fidelity now will make it tougher for new investors to get in, starting Sept. 30.
Tougher, but not impossible: The nation’s largest stock fund still will be wide open to any investors who have access to it through employer-sponsored retirement-savings programs. And that’s a lot of people.
But let’s deal with the key issue here, which is bigness itself. Do stock funds lose their performance edge as they balloon in size--becoming victims of their own success, as it were?
Some do, as Russ Wiles notes in his column today on D3. But a look at the 25 largest general U.S. stock funds’ performances over the last 6 1/2 years suggests that it’s a gross exaggeration to say that big is bad.
In fact, in many cases, the biggest funds have been the better funds to own in this long 1990s bull market.
That makes perfect sense on one level: How does a mutual fund get to be big in the first place? Usually it’s because the fund’s performance is consistently strong, which naturally attracts more investors to it over time.
In the 1990s, even as they have mushroomed in size, many of the biggest U.S. stock funds have continued to generate robust returns that have kept existing shareholders happy and brought new ones through the door.
That has made many of the funds, such as Investment Company of America, Vanguard Windsor, Fidelity Contrafund and T. Rowe Price Equity Income, staples of 401(k) plans and virtual household names with millions of Americans.
*
The Times asked fund tracker Lipper Analytical Services in New York to take the 25 largest general U.S. stock funds as of July 31 and generate performance data back to 1991, the first full year of the 1990s bull market.
We then compared the performance of those funds each year with that of the passively managed Vanguard Index 500 fund--which merely seeks to replicate the performance of the Standard & Poor’s 500-stock index--and with the performance of the average general U.S. stock fund, a broad category of 2,900 funds that includes small-stock funds, blue-chip funds, etc., but not international or specialty funds.
Here’s what the numbers in the accompanying chart show:
* From 1991 through 1995, the percentage of the 24 biggest stock funds (the 25 excluding Vanguard Index 500, now the No. 2 fund in assets) that beat the Vanguard Index fund was greater each year than the percentage of all general U.S. stock funds that beat the index fund.
In 1991, for example, 63% of the 24 biggest funds beat the index return, while 59% of all U.S. funds did so. In 1995, 21% of the 24 biggest funds beat the index, while 16% of all U.S. funds did so.
* In 1996, many of the biggest funds struggled relative to the index. Only 13% of them topped the index return, as the bull market’s strength was concentrated in a handful of major stocks (Coca-Cola, Intel, etc.) that the funds may have owned, but not in the heavy concentration that the index fund did.
By contrast, 24% of all U.S. funds beat the index in 1996.
* This year, not one of the biggest funds is beating the index return (through Thursday). Of all U.S. funds, just 5% are beating the index.
Still, a majority of the biggest funds--54%--are posting returns this year that are better than the 19.1% average return of all general U.S. stock funds, according to Lipper.
*
Students of statistics might immediately question this data on one count: Our list shows the 25 biggest funds as of this year, but that list would have been different six years ago, as some funds have grown much more than others since then.
Still, Lipper data show that about half the funds on the 25-largest list today also were on it in 1991. And nearly all of the funds on the list today were already of substantial size in 1991 versus the typical fund, even if they weren’t on the 25-largest list.
Taken at face value, the chart data provide a strong defense of the merits of owning the biggest stock funds, at least for most of this decade.
“This whole thing is nonsense [regarding Magellan’s closure] that big funds can’t do well,” says Don Phillips, head of fund tracker Morningstar Inc. in Chicago. Being big, he says, “doesn’t mean a fund has to be boring, or can’t be a good performer.”
Indeed, the biggest funds produced strong relative returns not just in 1991, ’94 and ‘95--when the blue-chip stocks that dominate the S&P; 500 index, and also are the bread-and-butter issues of most big funds, performed well--but they also handily beat the index in 1992 and ‘93, two years when the S&P; index showed modest gains.
The big funds’ better returns in 1992 and ’93 may have owed to the fact that many of the funds also invest in smaller stocks that aren’t in the S&P; index. (Those stocks performed better, overall, than blue chips in 1992 and ’93.)
Or the big funds’ managers may simply have been better stock pickers overall--which is, of course, what their shareholders are paying them to do.
But what about the 1996 and year-to-date returns of the big-fund universe? Could their under-performance suggest that their size is finally beginning to hamper them?
It’s true, after all, that the most monstrous growth period for many of these funds has just been in the last three years. Investment Company of America, for example, has doubled in size since 1994, to nearly $39 billion today; AIM Constellation has rocketed to $14.6 billion in assets today from just $3.7 billion at the end of 1994.
*
Only time will tell if the funds’ assets have in fact reached some kind of critical mass--like a supernova star that suddenly collapses in on itself. But many mutual fund analysts, like Phillips, argue that there is no reason why these funds can’t continue to shine.
For one thing, Magellan is an anomaly in size: After the Vanguard Index fund, at $45.9 billion, the No. 3 fund’s assets are just 62% of Magellan’s.
Most of the biggest funds are in the $10 billion to $22 billion asset range--no bigger than Magellan was in its peak performance years.
Rather than worry about the size of the funds, experts suggest that the funds’ shareholders and potential shareholders focus on what’s inside--in terms of investment objective, style of management, quality of management and the level of risk taken to achieve a desired return.
Although these funds are far bigger today than six years ago, so too is the global equity market. There are many more stocks from which to choose, here and abroad, and thus more opportunity for investment success (and failure). Many of the big U.S. funds, in fact, have diversified into shares of large multinational companies that are based abroad but do substantial business in the United States.
Also, because most of the big funds are managed by the largest U.S. fund companies--like Fidelity and the Los Angeles-based American Funds (which control Investment Company of America and Washington Mutual, among others)--the level of investment expertise and the quality of research and analysis of stocks is far above what many smaller investment management companies can afford.
With any actively managed mutual fund, “you’re not buying a fund--you’re investing your money with a manager,” notes Dan Wiener, editor of the New York-based Independent Adviser for Vanguard Funds newsletter.
While it has been easier and more lucrative in recent years to simply take the passive index approach to investing, indexing entails risks that only bear markets truly reveal. In the meantime, as the data above show, paying for active management in the biggest stock funds of all hasn’t been a bad decision in the 1990s, at least relative to stock funds in general.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
How the Biggest Stock Funds Have Fared
How big is too big for a stock fund? Here’s a look at how the 25 largest stock funds (as measured by asset totals at July 31) have fared each year since 1991. The list includes the Vanguard Index 500 Trust, which seeks to replicate the Standard & Poor’s 500 index, but excludes other such index funds. Only funds categorized as “general stock funds” by Lipper Analytical are included (no balanced or international funds). The average general return listed is for all such stock funds, not just the biggest.
*--*
Fund Assets (billions) ‘91* ‘92* Fidelity Magellan $62.9 41.0% 7.0% Vanguard Index 500 45.9 30.2 7.4 Investment Co. of Amer. 38.9 26.5 7.0 Washington Mutual 34.6 23.5 9.1 Fidelity Growth & Income 34.3 41.8 11.5 Fidel. Contrafund 29.9 54.9 15.9 American/20th Cent. Ultra 23.4 86.5 1.3 Vanguard Windsor II 21.8 28.7 12.0 Vanguard Windsor 21.6 28.6 16.5 Fidelity Equity Income 19.7 29.4 14.7 Fidelity Adv. Growth Opp. 19.7 42.7 15.0 Janus Fund 19.5 42.8 6.9 Income Fund of America 18.8 23.9 13.1 Fidelity Equity-Income II 17.4 46.6 19.1 Putnam Growth & Inc. A 16.8 19.2 11.8 Dean Witter Dividend Growth 15.4 30.6 5.8 AIM Constellation 14.6 70.4 15.0 Fidelity Blue Chip 12.9 54.8 6.2 Growth Fund of America 11.7 35.8 7.4 T. Rowe Price Equity-Income 11.4 25.3 14.1 Putnam Voyager 11.2 50.3 9.7 Fidelity Growth Company 11.1 48.3 7.9 Fundamental Investors 9.9 30.3 10.2 American Mutual 9.5 21.7 7.8 Brandywine Fund 8.7 49.2 15.7 Avg. general U.S. stock fund 35.6 8.9 Pctg. of biggest beating S&P; index 63% 75% 100% Pctg. of all funds beating S&P; index 59% 58% 64% Pctg. of biggest beating avg. fund 54% 63% 92%
Fund ‘93* Fidelity Magellan 24.7% Vanguard Index 500 9.9 Investment Co. of Amer. 11.6 Washington Mutual 13.1 Fidelity Growth & Income 19.5 Fidel. Contrafund 21.4 American/20th Cent. Ultra 21.8 Vanguard Windsor II 13.6 Vanguard Windsor 19.4 Fidelity Equity Income 21.3 Fidelity Adv. Growth Opp. 22.2 Janus Fund 10.9 Income Fund of America 14.0 Fidelity Equity-Income II 18.9 Putnam Growth & Inc. A 14.4 Dean Witter Dividend Growth 14.2 AIM Constellation 17.3 Fidelity Blue Chip 24.5 Growth Fund of America 14.5 T. Rowe Price Equity-Income 14.8 Putnam Voyager 18.4 Fidelity Growth Company 16.2 Fundamental Investors 18.2 American Mutual 14.3 Brandywine Fund 22.6 Avg. general U.S. stock fund 12.5 Pctg. of biggest beating S&P; index Pctg. of all funds beating S&P; index Pctg. of biggest beating avg. fund
*--*
*
*--*
Fund Assets (billions) ‘94* ‘95* ‘96* Fidelity Magellan $62.9 -1.8% 36.8% 11.7% Vanguard Index 500 45.9 1.2 37.5 22.9 Investment Co. of Amer. 38.9 0.2 30.6 19.4 Washington Mutual 34.6 0.5 41.2 20.2 Fidelity Growth & Income 34.3 2.3 35.4 20.0 Fidel. Contrafund 29.9 -1.1 36.3 21.9 American/20th Cent. Ultra 23.4 -3.6 37.7 13.9 Vanguard Windsor II 21.8 -1.2 38.8 24.2 Vanguard Windsor 21.6 -0.2 30.2 26.4 Fidelity Equity Income 19.7 0.2 31.8 21.0 Fidelity Adv. Growth Opp. 19.7 2.9 33.0 17.7 Janus Fund 19.5 -1.1 29.4 19.6 Income Fund of America 18.8 -2.5 29.1 15.2 Fidelity Equity-Income II 17.4 3.2 26.4 18.7 Putnam Growth & Inc. A 16.8 -0.3 36.5 21.8 Dean Witter Dividend Growth 15.4 -3.2 34.9 19.3 AIM Constellation 14.6 1.3 35.5 16.3 Fidelity Blue Chip 12.9 9.9 28.4 15.4 Growth Fund of America 11.7 0.1 29.8 14.8 T. Rowe Price Equity-Income 11.4 4.5 33.4 20.4 Putnam Voyager 11.2 0.4 40.2 12.8 Fidelity Growth Company 11.1 -2.2 39.6 16.8 Fundamental Investors 9.9 1.3 34.2 20.0 American Mutual 9.5 0.3 31.4 16.2 Brandywine Fund 8.7 0.1 35.8 24.9 Avg. general U.S. stock fund -1.7 31.1 19.5 Pctg. of biggest beating S&P; 29% 21% 13% 0 index Pctg. of all funds beating S&P; 23% 16% 24% 5% index Pctg. of biggest beating avg. 79% 71% 46% 54% fund
Fund ‘97* Fidelity Magellan 20.5% Vanguard Index 500 23.4 Investment Co. of Amer. 22.0 Washington Mutual 20.9 Fidelity Growth & Income 19.8 Fidel. Contrafund 17.4 American/20th Cent. Ultra 21.0 Vanguard Windsor II 21.2 Vanguard Windsor 22.9 Fidelity Equity Income 21.3 Fidelity Adv. Growth Opp. 19.6 Janus Fund 17.0 Income Fund of America 13.9 Fidelity Equity-Income II 17.5 Putnam Growth & Inc. A 17.8 Dean Witter Dividend Growth 18.0 AIM Constellation 17.9 Fidelity Blue Chip 20.3 Growth Fund of America 21.8 T. Rowe Price Equity-Income 18.6 Putnam Voyager 17.2 Fidelity Growth Company 17.8 Fundamental Investors 22.3 American Mutual 16.7 Brandywine Fund 22.6 Avg. general U.S. stock fund 19.1 Pctg. of biggest beating S&P; index Pctg. of all funds beating S&P; index Pctg. of biggest beating avg. fund
*--*
* Total investment return
Source: Lipper Analytical Services
