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Fat Fund Report

Measuring the Mutual Fund Universe

If something is profitable to do, you can bet lots of people will be doing it. The same principle that explains the rising tide of drug marketing also explains the incredible number of mutual funds— it’s a profitable business. And the profits in the business all come from one place, our money. Perhaps it shouldn’t be surprising that the number of funds in many fund categories now exceeds the number of funds that existed when I began writing a personal finance column in 1977.

While it isn’t reasonable to expect people to manage our money for free, an exploration of the universe shows that there are gigantic differences in fees. More important, paying more doesn’t mean you get a higher return. It usually means you’ll get a lower return because those fees all reduce the return on our money when we have a return. When we don’t have a return, the fees simply reduce our principal.

Today, there are 17,583 mutual funds and 12,428 of them have been around long enough to have a track record that is at least 3 years long. One reason the number of funds is so large is the burgeoning number of distribution channels. Where 40 years ago the vast majority of funds were the front-end commission type (now called “A” shares), today we have “B” shares and “C” shares, as well as 529 plan shares, Institutional shares and no-load shares. We even have an entirely new kind of mutual fund, the Exchange Traded Index fund.

Confusing? Yes. But the proliferation of distribution channels has created an abundance of opportunities for self-directed investors to make choices that can chop their investment expenses dramatically. (To see how much, see “You Can Pay a Little, or a Lot: The Range of Mutual Fund Expenses.”)

To keep the research task manageable— and the benchmarking figures statistically reasonable— I’ve limited this exploration to the 17 categories that have at least 300 funds with track records that are at least three years long. This excludes a whopping 52 categories plus all the state specific tax-free municipal bond funds. That may seem like a lot of excluded funds but the reality is that those 17 categories happen to contain most of the money invested in mutual funds. You can understand this by considering a few simple examples. The largest fund in the “large blend” category is the S& P 500 Exchange traded fund, SPY. It has $61.5 billion in assets. The first of the managed funds in the category ranks number three.

It’s the American Funds Investment Company of America A shares with $43.2 billion in assets.

The largest category excluded is “Diversified Emerging Markets” and the largest fund in that category is the iShares MSCI Emerging Markets Exchange traded fund, EEM. It has $28.2 billion in assets and the next largest fund, the Vanguard Emerging Markets exchange traded fund, VWO, has only $9.5 billion in assets. I’m excluding a lot of large funds in different categories, but I believe Pareto’s Law applies here— we’re likely talking about 80 percent of all mutual fund assets.

When, and if, time allows I’ll expand this exercise to include more categories. The important thing, for now, is that our result includes the majority of all funds.