Grades are now given for mutual funds, along with other enhancements to our annual guide.

The addition of brand-new mutual fund tools and features to AAII.com has led to several changes being incorporated in this year’s guide to mutual funds. 

One of the first things long-term readers of this guide will notice is a change in the categories used. Previously, we used our own category descriptions. This year, we have switched to Morningstar Inc.’s classification system. Morningstar’s categories are more nuanced in terms of describing the type of strategy a fund is designed to follow. For instance, a fund primarily holding large-cap stocks no longer simply belongs to the large-cap category. Instead, it is categorized as a large-blend, a large-growth or a large-value fund. 

We have also incorporated our new mutual fund grades alongside the three-, five- and 10-year return figures. These grades range from A to F. The scale works just like it did when you were in school, A’s are good, while F’s are bad. Each of these grades is tied to a percentile rank based on how a specific fund compares to its category peers. A fund whose returns for a given period rank in the top quintile (best 20%) relative to its category peers will receive a grade of A. Lower grades are assigned for lower quintile rankings. So, a grade of C means the fund’s returns for a certain period were about average relative to its category peers (the 41st to 60th percentile). 

Three additional new data points are included. Beta is displayed for stock funds. This is a measure of volatility. A beta of 1.00 implies that the fund’s returns have been as volatile as the S&P 500 index. Betas above 1.00 imply greater volatility, while betas below 1.00 imply less volatility. For bond funds, the assigned Morningstar style is displayed that signifies the fund’s interest rate sensitivity, which influences how relatively volatile a bond fund may be.

The third indicator is the R-squared value. It represents the percentage of a fund’s movement that can be explained by movements in the fund’s benchmark. The closer the value is to 100%, the more closely the returns have matched the benchmark. Lower values are perceived as signaling a more active approach to selecting investments for the portfolio.

More Than 25,000 Funds Covered on AAII.com 

Our switch to using the Morningstar categories allowed us to greatly expand the universe of mutual funds in our online guide. AAII members can now track and analyze over 25,000 mutual funds at www.aaii.com/guides/mfguide. These funds include those sold primarily through advisers (e.g., American Funds, Dimensional Fund Advisors, etc.) and those offered primarily through retirement plans. No-load and low-load mutual funds that are available for purchase directly through a discount broker or from the mutual fund family remain included in our online universe.

Given that covering all of them in a print publication would be unwieldy, we’ve taken a more focused approach to which funds are specifically included in this year’s printed guide. Categories were chosen to match our Asset Allocation Models (available at www.aaii.com/asset-allocation). We then added asset allocation and target-date mutual funds. The latter are commonly included in workplace retirement plans [e.g., 401(k) plans] and are often the default investment option for plans with an auto-allocation feature. We further required funds to be of significant size and to not charge a load to increase the likelihood of covering funds most likely to be of interest to AAII members.

If a specific fund you are interested in is not featured in this year’s guide, go to www.aaii.com/guides/mfguide. On our website, you’ll be able to analyze it and compare it to other funds. You’ll also be able to track it with our new My Portfolio tool.

Trends in the Mutual Fund Space

If we were to use a single word to describe what happened among equity mutual funds last year, it would be “outflows.” Investors withdrew more than $301 billion out of equity funds during the first 11 months of 2019 according to the Investment Company Institute (ICI). Most of these outflows came from domestic equity funds ($251 billion). 

The money didn’t necessarily flow to exchange-traded funds (ETFs), however. Bond mutual funds realized inflows of nearly $276 billion over the same period, much of it going to taxable funds. 

Refinitiv (formerly Thomson Reuters) described equity funds as experiencing their “worst ever” year based on their estimate of 2019 outflows. Last year was the fifth consecutive year of outflows for domestic equity funds. Both value and growth funds incurred withdrawals from investors. The firm further described taxable bond funds as experiencing their second-largest amount of calendar-year inflows in history and muni debt funds experiencing their best ever year. 

At the same time, passive equity funds overtook actively managed funds. Citing data from Morningstar, The Wall Street Journal noted that the assets of funds tracking broad U.S. equity indexes exceeded those of actively managed funds for the first time last August. 

Whether there will be an increase in the number of fund families with actively managed funds choosing to jump into the ETF pool remains to be seen. The U.S. Securities and Exchange Commission (SEC) made launching new ETFs easier by streamlining the approval process. Previously, asset managers had to seek an exemptive order to launch a new ETF; now they simply have to provide the required documentation. To date, the overwhelming majority of actively managed ETFs have yet to gather much in assets under management. Active management continues to primarily be in the mutual fund arena. 

Brokers Still Charging for Mutual Fund Trades

Most discount brokers stopped charging commissions on stocks and ETFs during the fourth quarter of 2019 and in January of this year. This change in commission structure has yet to extend to mutual funds. Purchases and sales of mutual funds not included on brokers’ n0-transaction-fee lists continue to cost between $20 and $50 per transaction.

Fortunately, individual investors have options. Discount brokers offer between 2,500 and 4,000 mutual funds on a no-transaction-fee basis as shown in our discount brokerage guide (January 2020 AAII Journal). Mutual funds can also be bought and sold directly from their sponsors. The latter will require opening an account directly with the fund family or their brokerage arm, if they offer one. (Fidelity, Schwab and Vanguard all offer their respective funds through their brokerage units.)

How to Use This Guide 

Selecting a mutual fund, while less time-consuming than investing in individual securities, does involve some homework. No one should put money into an investment that they do not understand. This does not mean that you need to perform a detailed investigation of the fund’s investments, but it does require an understanding of the fund’s investment objective, strategy, risks and performance history. 

Those who are new to mutual funds or less familiar with them may find the “How to Choose a Mutual Fund” article in this issue to be helpful. Additional insights about mutual funds can be found in the Funds section of AAII.com (www.aaii.com/funds). 

Several performance tables are presented. Table 1 lists the total-return performance of common index benchmarks. Table 2 summarizes average performance and risk of all fund categories. Table 3 allows you to compare the performance of the 50 most widely held funds (funds with the highest total assets). Table 4 lists the 50 best-performing funds of 2019 and Table 5 lists the 50 worst-performing funds of 2019. While past performance is no indication of future performance, it may attest to the quality and consistency of fund management.

In the main fund listings, funds are grouped by category and listed alphabetically within each category; the ticker symbol is indicated after each fund name. (As previously stated, the categories have changed this year.) The listings provide information on a variety of return and risk data, portfolio composition and fees and expenses. Index funds and funds that are closed to new investors are indicated by a checkmark in those respective columns.

Grades are displayed by some of the annualized returns and the risk index. These mutual fund grades were recently introduced on AAII.com. They compare a fund against its peers. A grade of “A” implies that the stock ranks in the best 20% for a given statistic (top 20% for returns, bottom 20% for risk). A grade of “F” implies that the stock ranks in the worst 20% (bottom 20% for returns, top 20% for risk).

(A description of each category can be found here.) 

If you would like to request a copy of a fund prospectus and annual report, telephone numbers and website addresses of the fund families are provided at the end of this article. Make sure you read the prospectus carefully before investing in any mutual fund. 

Which Funds Were Included

The funds that appear in the printed and PDF version of this guide were selected from the universe of open-end funds tracked through Nasdaq. The following are the various screens we used for the final selection.

Categories 

Categories were mostly limited to those included in our Asset Allocation Models for the print version of this guide. These stock and bond fund categories are also the most frequently found in individual investors’ portfolios. Balanced funds and target-date funds were also included because of investor interest and their use in workplace retirement plans.

Historical Record

Only those funds with three full years of data are included so that there is a performance record of significant length and all performance measures can be calculated. 

Size

Funds must appear in the Nasdaq mutual fund listings. Large-cap funds were generally required to have at least $10 billion in assets. All other included funds were generally required to have at least $5 billion in assets.

Loads

Only no-load mutual funds are included. Funds charging a load were excluded because of the large number of no-load funds available to individual investors and the drag on returns a front-end or back-end fee can have.

Expenses 

Funds with significantly higher expense ratios than the average for their category are generally excluded.  

Performance 

For the most part, funds that significantly underperformed the average performance of their category are not included.  

Interest and Availability

Only those funds that are of general interest to mutual fund investors and available for investment by individual investors directly from the fund, without restrictions, are included in the print version of this guide. If a fund family offers multiple no-load classes of its funds, the investor or retail class is presented. 

Funds Not Included 

AAII members who would like performance figures for mutual funds that do not appear in the print version of this guide can access this information at www.aaii.com/guides/mfguide, where data on more than 25,000 funds can be found. These include funds sold exclusively through advisers and those designated with special share classes, such as retirement. 

Additional analysis can be conducted with our Compare Funds tool. You can use it to compare and contrast return, risk and turnover information for two or more funds. You can also track the funds you own or are most interested in with My Portfolio.

A Key to Terms and Statistics

Most of the information shown in the listing is provided by Morningstar, but some may come from mutual fund reports (the prospectus and annual and quarterly reports) and solicitation of information directly from the fund. Any data source has the potential for error, however, so before investing in any mutual fund, you should read the prospectus and the annual report.

When a dash or an “na” appears in the performance tables or in a mutual fund listing, it indicates that the number was not available or does not apply in that particular instance. For example, the 10-year annual return figure would not be available for funds that have been operating for less than 10 years. All numbers are truncated rather than rounded when necessary, unless noted otherwise in the descriptions below.

The following provides an explanation of the terms we have used in the performance tables and mutual fund listings. The explanations are listed in the order in which the data and information appear in the listing.

Index Fund: Funds with a checkmark in this column are designed to follow an index, such as the S&P 500; the amounts invested in each security are proportional to the issue’s representation in the index that the fund tracks. Because index funds are not actively managed, they make no research efforts to select particular stocks or bonds, and they do not make timing decisions. They are always 100% invested. This passive management approach means that the expenses and the cost of managing an index fund are extremely low. The online guide reports on the index tracked by these funds.

Closed: A checkmark in this column indicates that the fund is not accepting purchases from new investors. Some closed funds may also suspend additional investments from existing shareholders.

Fund Name: The funds are presented alphabetically by fund name within each category.

Ticker: The ticker symbol for each fund is given in parentheses for investors who want to access price quotes or conduct further research. The ticker is four letters and ends with an “X,” indicating that it is a mutual fund. For example, the large-value Dodge & Cox stock fund ticker is DODGX.

Total Return (%): Return percentages for each of the last five years.

3-Year Annual Return (%)—Fund, Grade and Category +/-: Assuming an investment on January 1, 2017, the annual total compound return if held through December 31, 2019; and the difference in fund annual return for the period from the average return for the period for all funds in the same category. When the difference from category is negative, the fund underperformed the average fund in its investment category for the period by the percent indicated. Returns that are in the top 20% of all funds in the investment category are awarded a grade of A.

5-Year Annual Return (%)—Fund, Grade and Category +/-: Assuming an investment on January 1, 2015, the annual total compound return if held through December 31, 2019; and the difference in fund annual return for the period from the average return for the period for all funds in the same category. Returns that are in the top 20% of all funds in the investment category are awarded a grade of A.

10-Year Annual Return (%)—Fund, Grade and Category +/-: Assuming an investment on January 1, 2010, the annual total compound return if held through December 31, 2019; and the difference in fund annual return for the period from the average return for the period for all funds in the same category. Returns that are in the top 20% of all funds in the investment category are awarded a grade of A.

Yield (%): The per-share annual income distribution made by the fund divided by the sum of the year-ending net asset value plus any capital gains distributions made during the year. This ratio is similar to a dividend yield and would be higher for income-oriented funds and lower for growth-oriented funds. The figure only reflects income; it is not a total return number. For some funds, the yield may be distorted if the fund reports short-term capital gains as income.

Tax-Cost Ratio (%): Measures how much a fund’s annualized return is reduced by the taxes paid on distributions, assuming the maximum marginal tax rate. A tax-cost ratio of 0.0% indicates that the fund did not pay any taxable income or make capital gains distributions. A 3.0% tax-cost ratio means that each year, investors lost an average of 3.0% of their assets to taxes. The lower the ratio, the more tax-efficient the fund. The ratio is calculated using the last year of data.

Risk Index—Category, Grade and Total: The Category Risk Index is the standard deviation of a fund’s return divided by the standard deviation of return for the average fund in the category. The Total Risk Index is the standard deviation of a fund’s return divided by the average standard deviation of return for all funds. Standard deviation is a measure of return volatility and is computed using monthly returns for the last three years. A value of 1.00 denotes average risk. Values above 1.00 indicate greater-than-average risk while values below 1.00 indicate less-than-average risk. Risk numbers that are in the lowest 20% of all funds within the investment category are awarded a grade of A.

Beta: A measure of volatility for stock funds. A beta of 1.00 implies that the fund’s returns have been as volatile as the S&P 500. Betas above 1.00 imply greater volatility, while betas below 1.00 imply less volatility.

Interest Rate Sensitivity: How sensitive the prices of the bonds held in a bond fund’s portfolio are to changes in interest rates. The levels are limited (Lim), moderate (Mod) and extensive (Ext).

R-squared (%): The percentage of a fund’s movement that can be explained by movements in the S&P 500. The numbers can range from 0% to 100%. The more closely the returns matched the S&P 500 over the last three years, the higher the percentage.

Total Assets ($ Mil): Aggregate fund value for all share classes in millions of dollars at the end of the calendar year.

Portfolio (%)—Stock/Bond/Other/Cash: The portfolio composition columns classify investments by type and give the percentage of the total portfolio invested in each. Some funds are “funds of funds” and their portfolio holdings may be denoted by “100% other.” Due to rounding of the percentages and the practice of leverage (borrowing) to buy securities, the portfolio total percentage may not equal 100%.

Percent of Portfolio in Foreign Issues: The percentage of the fund’s assets invested in foreign stocks and bonds.

Portfolio Turnover Ratio (%): A measure of the trading activity of the fund, computed by dividing the lesser of purchases or sales for the year by the monthly average value of the securities owned by the fund during the year. Securities with maturities of less than one year are excluded from the calculation. The result is expressed as a percentage, with 100% implying a complete turnover within one year.

Number of Holdings: The total number of individual securities held by the fund. These can include stocks, bonds, currencies, futures contracts and option contracts. This figure is meant to be a measure of portfolio risk: The lower the number, the more concentrated the fund is in a few issues. Funds that are “funds of funds” may look concentrated if they invest in a small number of funds.

Percent of Portfolio in Top 10 Holdings: Investments, expressed as a percentage of the total portfolio assets, in the fund’s top 10 portfolio holdings. The higher the percentage, the more concentrated the fund is in a few companies or issues, and the more the fund is susceptible to market fluctuations in these few holdings. Used in combination with the number of holdings figure, the percent of portfolio in top 10 holdings figure can indicate how concentrated a fund is. For funds that are “funds of funds,” this figure will not be indicative of concentration.

Expense Ratio (%): The sum of administrative fees plus adviser management fees and 12b-1 fees divided by the average net asset value of the fund, stated as a percentage. Brokerage costs incurred by the fund are not included in the expense ratio but are instead reflected directly in net asset value. Front-end loads, back-end loads, redemption fees and account activity charges are not included in this ratio. Some funds are “funds of funds” and their expense ratios will not reflect the expenses of all funds held by the fund.

12b-1 Fee (%): If a fund has the ability to charge a 12b-1 fee, the percentage actually charged is given. A — = no 12b-1 fee can be charged.

Allocation Funds

Allocation funds are balanced funds and target-date funds. These funds differ from traditional stock and bond mutual funds by providing the premise of asset class diversification within a single fund. Whereas an investor would have to choose different stock and bond funds to build a diversified portfolio, a single allocation fund could help serve the same role.

The difference for investors is customization. Balanced and target-date funds follow diversification strategies determined by their objectives and their managers. They are designed for a broad audience of investors. Investors desiring customization and/or control over their allocation decisions should opt for individual stock and bond funds instead. A diversified portfolio can also potentially be created and maintained at a lower annual cost if individual funds are prudently selected.

We’ve put these funds in a separate section in our guide in Table 8 for a few reasons. Target-date funds have become a common default option in 401(k) and other workplace retirement plans with an auto-allocation feature. As the name implies, auto-allocation automatically allocates participants to an age-appropriate target-date fund when they enroll in the plan. It is typically combined with auto-enrollment, which makes participating in the workplace retirement plan the default option for employees. AAII members who are working may have employers offering 401(k) plans with these options. Members who are retired may have children or grandchildren who invest in these funds. (If you are in this latter category, share this guide with them.)

Balanced funds are an option for AAII members who desire to follow a certain allocation but prefer the simplicity of single fund. They typically combine stocks and bonds, though other asset classes may also be included. As such, balanced funds are a separate category from stock and bond funds. In our listing, balanced funds fall into Morningstar “allocation” categories, based on the percentage held in equities.

How Balanced and Target-Date Funds Differ

Though balanced and target-date funds are both designed to provide investors with diversified portfolios, they do differ from one other. Balanced funds tend to follow a preset diversification, whereas target-date funds evolve their allocations over time. 

Vanguard’s Wellington fund (VWENX) provides a good example of a balanced fund. It maintains an allocation of approximately two-thirds to stocks and one-third to bonds. It would appeal to investors who desire such an allocation but prefer to leave the responsibility of maintaining it to a portfolio manager.

Allocations vary by balanced fund, making it important to read the prospectus. The Fidelity Balanced fund (FBALX) has a 65% allocation to stocks and a 35% allocation to bonds and cash. The Fidelity Asset Manager 20% fund (FASIX) is far more conservative, with just an approximate 20% weighting to stocks. Before choosing a balanced fund, give thought to the allocation you desire and then choose the best fund to achieve that allocation.

Target-date funds’ allocations are designed to evolve over time. Their purpose is to help a person invest for a projected retirement date, as well as for a period afterward. The targeted retirement date is stated in the fund’s name—for example, the T. Rowe Price Retirement 2020 fund (TRRBX) is designed with a target date of 2020. An investor planning to retire this year (2020), or within the next one or two years of that date, would consider holding onto this fund. A younger investor—say, someone who is currently in their 30s—may prefer a 2055 or 2060+ fund. These funds’ target dates coincide approximately with the time the younger investor will be entering their 60s.

As the projected retirement date moves closer, target-date funds change their portfolio mix to adjust the level of risk the fund sponsor believes shareholders should be taking—as opposed to a balanced fund, which maintains more a static allocation. The actual allocation and how often the allocation changes varies from fund to fund. Furthermore, at the target date, a fund can either adopt a final allocation strategy or continue to evolve.

Balanced funds can invest in individual securities or other funds. Target-date funds are funds of funds. Instead of holding individual securities, they hold shares in other funds from the same fund family. T. Rowe Price’s target-date funds, for instance, invest in other T. Rowe Price funds. This allows the target-date fund manager to focus on making allocation decisions instead of also having to consider what securities should be held. The downside is that an investor has no control over the funds chosen, is locked into the target-date fund’s family and may experience an inappropriate level of price volatility (either too little or too much, given personal financial needs and emotional tolerances). 

Don’t Judge a Target-Date Fund by Its Date Alone 

Even when they share the same retirement date, target-date funds can hold different allocations. Some mutual fund families follow a “to” glide path to allocation while others follow a “through” glide path. A “to” glide path assumes the fund is being managed to get shareholders to retirement. At retirement, this glide reaches a final or near-final conservative allocation. A “through” glide path goes past the retirement date for a period of time. Rather than reaching its final allocation at retirement, the allocation evolves for a period of time afterward. A target-date fund’s prospectus will explain how far after the retirement date the portfolio is designed to continue evolving. (Balanced funds are typically designed to maintain their allocation into perpetuity, as long as their objective does not change.) 

We’ll use the T. Rowe Price Retirement 2020 and the Vanguard Target Retirement 2020 Investor Class (VTWNX) as examples. Both funds are designed for someone who is planning on retiring this year or during the next two years. The T. Rowe Price fund has 55.4% of its portfolio allocated in stocks, 41.0% of its portfolio in bonds and 3.1% in cash. The Vanguard fund has 50.8% of its portfolio in stocks, 47.4% of its portfolio bonds and 1.8% in cash. 

As you can see, the T. Rowe Price fund has a comparatively more aggressive allocation with greater exposure to stocks and less exposure to bonds. This reflects its longer glide path. T. Rowe Price Retirement 2020’s exposure to stocks is expected to decline for approximately another 30 years. Vanguard uses a much shorter glide path. Vanguard Target Retirement 2020 Investor’s glide path will continue to evolve over the next approximately seven years before reaching its final allocation.

Neither strategy is necessarily better or worse, just different. Those interested in owning a target-date fund outside of a workplace retirement plan can compare the glide path strategies of different fund families to determine which is more appropriate. AAII members holding target-date funds within a workplace retirement plan can adjust which dates to use based on their allocation preferences instead of planned retirement date. Longer-dated funds will have a larger allocation to stocks while shorter-dated funds will have a smaller allocation to stocks.

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