Active Management Pitch
At least in the part of the world where I live, MFS Investment Management is touting the value of “active management” in television commercials, reflected in the unabashedly asserted tagline “That’s the Power of Active Management”™
You remember what “active management” is, right? Highly compensated humans select individual stocks in an equity mutual fund and make transaction timing decision. Of course no independent (i.e., not financed by the financial services industry) study in the history of humankind has demonstrated that, after fees, active management consistently produces investor returns superior to computer-driven, low-fee index investing. But never mind this inconvenient truth; Wall Street active investment managers have made and continue to make an outstanding living seducing the financially uneducated and believers in the supernatural, and they’re not about to give it up just because active management is based on an ethically fraudulent premise.
MFS Actively Managed Fund Fees
Let’s have a look at MFS’ business model for fleecing small investors, illustrating with a randomly chosen MFS equity mutual fund. The data below is from Yahoo Finance.
MFS Value A fund (ticker symbol = MEIAX)
10-year expense projection (MFS’s ‘take’) per $10,000 of your money invested: $1,617
That’s right: over 10 years, MFS will transfer from your account to its coffers over 16% of the money you invested in its Value A fund. 16%! I’m astonished that anyone would submit to this sort of looting, but the fund manages nearly $32 billion! Amazing.
And what will you get in return? No one knows, but here’s how MFS Value A fund investors have done in the past:
→ MFS Value A fund load-adjusted average annual return over past 10 years: 6.20%
→ Comparable return generated by Vanguard’s S&P 500 index fund: 6.79%
Vanguard’s fee for its S&P 500 index fund amounts to $5.00 (yes, a five dollar bill, the one with Lincoln on it) per year on a $10,000 investment. At this rate, over 10 years, Vanguard would take $50 out of your account, compared to MFS’ $1,617.
In sum, if the next 10 years mirrors the last, by choosing MFS’s Value A fund instead of Vanguard’s S&P 500 index fund you’d pay an additional $1,567 in fees and get a 0.59 percentage point lower average annual return.
What a deal!?!
Which MFS Funds Beat the S&P 500?
I randomly chose the Value A fund for the comparison above. You may rightfully then be wondering: which of MFS’ actively managed U.S. equity mutual funds with a risk profile loosely comparable to the S&P 500 have bested the 6.79% average annual return of Vanguard’s S&P 500 index fund over the past decade?
Answer: Exactly none.
MFS does offer U.S. equity funds that have posted returns over the past 10 years higher than 6.79%. But all of these funds are considerably riskier (higher ‘beta,’ in Wall Street lingo) than the basket of S&P 500 stocks, focusing on technology and growth. Generally, these sorts of stocks will rise more than the S&P 500 in an up market, and fall more than the S&P 500 in a down market. Here’s an abbreviated list of the 10-year, load-adjusted returns of such MFS funds:
Growth Fund: 8.02%
New Discovery Fund: 7.26%
Technology Fund: 10.05%
For comparison, here’s the 10-year return of Vanguard’s Growth Index fund: 8.08%
Yep, if you’d been in MFS’ Technology Fund (top holding is Google) over the past decade, you’d have done well relative to a growth index fund. What do you suppose your chances would have been of choosing that particular fund among MFS’ nineteen U.S. equity mutual funds, not to mention the thousands of costly, inferior performing mutual funds available on Wall Street?
Active Mutual Funds Are a Rip-Off
The only “power of active management” excercised by MFS and other actively managed fund firms is the formidable power to enrich themselves at small investors’ expense, which the active management rip-off has done magnificently.
For 99.9% of small investors, avoiding actively managed funds is the best strategy. For more on the topic, have a look at these previous Money Counselor posts: