Mutual funds are becoming increasingly unpopular by the day. There’s a lack of Alpha, and plenty of evidence that mutual funds simply don’t outperform the market despite their fees. I’ve even wrote about the dirty practice of mutual funds to increase fees when they’re returns look good. For those that have beat the market, there is plenty of empirical evidence illustrating that the Alpha was just mere factor exposure. The same factor exposure can be achieved at a much lower cost via current smart beta ETFs.
Despite the doom and gloom I’m still a fan of mutual funds. You see, investing isn’t about finding the best strategy that’s going to produce higher returns. It’s about finding a strategy that you can consistently invest into and sleep well at night. An investor with a low risk strategy or allocation who only gets a small 5% annual return, but is fully invested all the time is going to do much better than if he went into a higher risk return strategy, but kept most of his cash on the sidelines.
I’m the risk adverse guy who keeps cash on the sidelines, and has a slight fear or the low growth prospects in developed markets around the world… I’m a bit of a perm a bear apparently. What can I invest in that keep me comfortable? For me that means a global portfolio, low drawdowns, investing in companies with solid fundamentals and a bullet proof balance sheet, and holding a bit of gold. First Eagle Global Fund (SGENX) delivers just that. Historically SGENX kicked ass through the lost decade of the 2000s and had a peak to trough drawdown of only 33%. SGENX also sports the qualities highlighted in my Ultimate Guide To Picking Alpha Mutual Funds by having manager investments over $1 million, and expense ratio in the cheapest to quintiles of funds in that category. The downside is that it does have a 1.15% expense and load fee of 5% (waived through Schwab), which many investors in the age of ‘cheap’ frown on.
Mutual Fund Alpha Can Be Bought Cheap With Smart Beta
Like all mutual fund alpha, the ass kicking performance of SGENX can be chalked up to factor based investing. Essentially SGENX holds about 35% the domestic equity with a ‘quality minus junk’ (QMJ) factor, 35% international QMJ equity, 20% cash and 10% gold. I could duplicate this myself with two simple smart beta ETFs and a cheap gold ETF with a total exspense ratio of about 50bps, about 50% less in fees and do about as good or better than SGENX. So why don’t I?
In one word, simplicity. In 2 words, hands off. As an investor who is aiming to consistently investing every week, I like to keep things hands off. The more off my hands are, the more money of mine gets invested. If I were to try to duplicate the mutual fund with low-cost ETFs, I would consciously have to allocate my funds and execute the trades. This would leave me wondering whether I got in at the right time or bought out in intraday high. Not only that, but when I am only investing a few hundred dollars at a time, there can be a lot of fractional share cash left out. Allocating a $500 weekly contribution into 3 funds, split 35% 35% 10% with varying share prices means some cash is getting left out of the portfolio. This leaves me with another conscious decision to make, what do I do with this left over cash that doesn’t make a whole share? Does it go on the best performing of my three assets or the least performing? Or maybe it should say in cash and drag the portfolio.
By investing into a mutual fund, I don’t have to worry about the manual allocation or fractional share part. I can simply set an automatic deposit into the fund that invests my maximum and avoids the cash drag. Hands off and simple. In my opinion it is worth the 1.15% fee. If I’m not using an ‘all in one’ style like my example I can still set up automatic deposits of varying amounts to mutual funds.
Important note: before diving headfirst into an active mutual fund it is important that you thoroughly understand the fund, its strategy, and the factor exposure it seeks. In this case I have done a good bit of research into the fund and have believe in its strategy and conviction in the management.