What type return should be expected from a managed mutual fund portfolio relative to a comparative index?

Not even sure the question makes sense and have a limited knowledge of how investments work. My quarterly statement from an account with an investment advisor shows my rate of return in a diversified mutual fund portfolio for a 5 year period and it's always lower than a comparative index. 5 points lower for the current year and less than one for the 5 year period. Net of 12.94 for the 5 years is good but should I be getting better from the advisor? Question may be too vague to answer but wanted thoughts from those more knowledgable on investing. Thank you.

OK, the general principle is that you will underperform the index by the amount of fees you are paying. But because fund returns go up and down and some funds are lucky and some unlucky, that is only a general principle.

This is why index funds are great. They are low-cost and tax efficient and underperform the market by their expense ratio (internal management fees). Over time, 80% of managed funds underperform the companion index fund. If you didn't pay loads or a higher expense ratio or 12b-1 fees, that number would be much different.

Here's a shocking example. I was comparing returns for a VUL - which is a high expense insurance police and also an investment (has mutual funds in it).

I compared the return on the S & P 500 fund in the VUL to the Vanguard S & P 500 fund - apples to apples, except for the fees.

The return on VUL S&P 500 Index Fund2: 6.85%
Vanguard's S & P 500 Index fund: 11.77% !!!!!!!!

THIS is what fees do to returns. Yes, some high cost funds will beat their index, but almost always not consistantly.

So, you need to find out what your fees are. ALL the fees. I suggest you use Morningstar.

Also, you need to read this:

http://www.bankrate.com/brm/news/BoomerB...

http://money.cnn.com/2006/03/05/news/new...

The more I learn, the more certain I am that the financial advising industry is a sham.

Very good question.

No, I think your questions are right on the money.

Given that you're paying for management, your adviser and the managers he/she selects should be able to beat the relevant index/benchmark. If they can't do that, and 5% is a huge underperformance, then why wouldn't you just put your money into index funds? You know what your performance will be relative to the index (just slightly less, about 0.15% less per year for large-cap domestic like the S&P 500).

Remember that you're competing with other investors. People think about the amount of money they put away, but I consider it a competition against other investors since that's who I'll be competing against for housing, health care, entertainment, travel, nursing care, etc.

If you are making the choice from among all the mutual funds out there you should have no trouble finding one that consistently has outperformed its peers. If your fund it consistently worse than its peers, I'd switch funds. if this fund was recommended to you by a financial advisor and his other advice has been equally mediocre I'd just dump the guy and do the research yourself. Don't get me wrong, there are some very good financial advisors out there, but there are a whole lot of turkeys too. Its my belief after working with several that sometimes their first priority it putting people into investments that pay them very high commissions and their second priortiy (somtimes distant second) is finding the best mutual funds (or other investments). Still most people know so little about it they are loathe to go it on their own (which is why the advisors can keep doing a lousy job and stay in business).

Anyhow, you should be able to find outperforming mutual funds on your own without much work (check a fund screener and just put in the criteria you want).

Best luck.

Index funds have very low fees. Managed funds have fees that may be .05% to .75% higher than the fees for the index funds. If you got 12.94% over a five year period, that is very good. My first rule of investing is "don't get greedy."

About 70% of managed funds do not do better than the S & P 500 Index.

answering questions about the level of return without knowing the level of risk undertaken to get that return doesn't work.

there is always a tradeoff between the risks you take and the return you get.

so i can't guess whether 12.94% is good, bad, or indifferent.

***
Oh sure, the fund company says that someone says the comparative index did XX.XX

did you actually look at any comparative measures of the risks assumed by the fund and the index?

My bet is that no such comparative risk measures were reported.

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Here's the fundamental problem with all the large mutual funds:

Their position size is large relative to the average daily trading volume in the shares they own. 'Large' in this context probably means higher than 1/100th.

This means that any move they try to make, whether to get in or get out of a particular stock, almost has to push the market price against them.

Sure, their managers know this and try to compensate by thinking ahead of the markets. Of course, every other fund manager in the whole universe of funds is trying to do the same thing at the same time.

That's about the same as a crowd of people trying to all leave the stadium after the end of the game. A few leave too early and miss the rally in the closing minutes. A few are lucky and get out perfectly. Most are stuck in line behind the few and have to wait and wait while the parking lots are jammed with folk trying to escape.


does this help or confuse?