The average mid-cap growth mutual fund comes with a 1.3% expense ratio. Whether this seems high to you or not might depend on how well these funds have done relative to common benchmarks. Semi-annual research from S&P Dow Jones Indices, operating independently from S&P Global Market Intelligence, continually paints a stark picture that many of these funds may not be worth the cost.
In this article, we will focus on domestic equity mutual funds with plans to discuss fixed income in another one, but encourage you to view the full report at www.us.spindices.com to learn how international equity and taxable bond funds performed. (There were also some pockets of strength for these mutual funds.)
Just 20% of all mid-cap growth and 12% of all small-cap growth funds outperformed the S&P MidCap 400 Growth and the S&P SmallCap 600 Growth indices, respectively. Meanwhile, 51% of all large-cap growth funds outperformed the S&P 500 Growth index.
On an equal-weighted basis, the average mid-cap growth fund returned -1.23% and lagged by 328 basis points in 2015, much higher than the expense ratio incurred. This suggests to us that unwarranted stock selections contributed to underperformance.
The average mid-cap growth fund returned -1.23% and lagged by 328 basis points in 2015, much higher than the expense ratio incurred.
Upon review of the mid-cap growth funds open to retail investors and with the most assets shown on MarketScope Advisor, Baron Growth Fund (BGRFX) and Putnam Equity Spectrum (PYSAX) were in the bottom quartile of this peer group in 2015. PYSAX has a 27% weighting in consumer discretionary, significantly larger than 15% weighting in the S&P MidCap 400 Growth index.
In contrast, Buffalo Discovery Fund (BUFTX) was a strong performer, rising 5.6% in 2015.
Investors who want to largely replicate the performance of the S&P 400 Growth index can use iShares S&P MidCap Growth (IJK). IJK has $5 billion in assets and has a 0.25% expense ratio.
Meanwhile, small-cap growth funds lost 2.2% in 2015, lagging the S&P SmallCap 600 growth index by 497 basis points; the average small-cap growth fund has a 1.4% expense ratio.
For perspective, iShares S&P Small-Cap Growth (IJT), which has $3 billion in assets, incurs a 0.25% expense ratio. In recent years, investors have been shifting assets out of actively managed U.S. equity mutual funds and into passive index mutual funds and ETFs. S&P Global Market Intelligence expects the trend to continue. While there are bright spots in every investment style, the appeal of low-cost alternatives that do not take sector bets is highly compelling in our opinion.