Like many companies, Stock Rover offers a 401K plan, which allows me to redirect some of my salary into savings for retirement. When I enrolled, I was given a single sheet of paper with a list of funds I could choose from. It looked like this:
Despite being financially literate, I was a bit lost. Which ones should I choose? How much should I put in each one? Luckily, to help me answer that question, I have this handy-dandy tool at my disposal that can help me figure out which of these 16 funds has the best performance and lowest overhead. Yup, you guessed it: it’s called Stock Rover.
While Stock Rover is a research tool primarily for stocks and ETFs, we also support mutual funds. So to compare these funds, see historical performance, and see the expense ratio, Stock Rover fits the bill.
Before I compare them in Stock Rover, I’m going to define the different types of funds (from the “Objective” column in the above image).
(The first three are not equity funds, the rest of them are.)
So what does “risky” even mean? For the purposes of 401K investing, I’m defining risky as the probability that you will end up with considerably less money than you expect, either by outright losing money, or by significant financial underperformance that leaves you well short of your expected investment return. With the safest (or least risky) investments, it’s unlikely that you would lose money (though it is possible). With the riskier funds, like small cap growth, you could actually lose significant money on the investment. For example, as a sneak preview, the small cap growth fund I’m offered, BUFSX, has a return of -9.6% this year (that’s negative 9.6%). While it does have a positive return over a longer time period, it could take a while to climb out of the 8.8%-sized hole from the past year.
So, now we have a general sense of what these funds contain and what I should expect from them risk-wise, let’s get into the research. The first thing I did was create a watchlist with these sixteen tickers. It’ll be important to keep in mind that not all these funds are equity funds and so I can’t expect them to be supplying the same sort of returns from a fund investing in equity. In particular, the bond and money-market funds essentially by definition are going to give lower returns. So now I’m going to tag the equity funds as “equity”, then group the table by tag so I can see the equity and non-equity funds together, and look at them in the Historical Returns View.
At a quick glance it looks like I have something to work with. It’s been a bad couple of weeks for most of them, and one of the funds (HSFNX) didn’t have a great year, but I’m seeing a lot of green in the longer time periods, which I like.
Before I continue, I should point out that one of these funds, SWVXX (the Schwab Value Advantage Money Fund) is a bit different than the others. If you look closely at the above screenshot, you’ll notice that all its returns are 0.0%. This is because money funds are always priced at a dollar so that there are no capital gains and losses—instead, the investor makes money off of interest. Currently in this low interest environment, the yield of SWVXX is effectively zero . For this reason, I’ll temporarily hide SWVXX by right-clicking on it and selecting ‘Hide’ from the drop-down menu.
Let’s see what happens when I switch over to Returns vs. the S&P 500. I’ve collapsed the non-equity group of tickers because it wouldn’t make sense to compare them to an equity benchmark.
This doesn’t look great for my equity funds. Out of 13 funds and 9 time periods, these funds beat the S&P 500 a total of only 10 times, or less than 10% of the time. Part of the reason for this general pattern of underperformance are the management fees associated with mutual funds that eat into returns (more on this later). The real standout here, because it has more than one cell of green, is PRBLX (highlighted), which is a large blend fund. Other than that, MXXIX beat the S&P 500 in the last month by 0.3%, so that’s good, I guess…
Let’s throw these guys in the chart to so we can see more gradation beyond just red. There are 13 equity funds I’m looking at, but Stock Rover’s chart allows only 12 lines, so I’ll split it up into two groups. I’ll add in the S&P 500 as a benchmark, but there’s no need to flatten it as a baseline because the above table pretty much told me everything I need to go regarding relative performance. It’s also important to note that Stock Rover already subtracts the expense ratio from the fund’s performance in the chart, so the returns you see would be the returns you receive. I touch on the expense ratio later in the blog post.
Here’s first group:
We can see that a few of these funds seem to have generally kept up with the S&P (in red) in the past year. I can also see that a few of them have not. HSFNX, our financial fund, has had a negative return this year, as has BUFSX, the small growth fund. The remaining tickers in this group (CVGRX, FAMVX, GABSX, HFCSX, and ISCLX) all have had positive returns this year in a somewhat even dispersion underneath the S&P. Let’s look at a five year time period:
Here you can see that the longer time period doesn’t reveal much more. While BUFSX had negative returns this year so far, over a longer time period it doesn’t look as bad—still, it has lost significant ground against some of the other funds. HSFNX still looks pretty weak and like it’s getting weaker. CVGRX had been struggling, though seems to have improved in the past year. Overall I’ll ditch BUFSX and HSFNX, and keep the others.
Let’s take a look at the second batch.
This batch has fared a bit better in the last year, with only one fund (UMBWX, foreign large growth) really struggling. We’ll remove that and keep the others, which all look to be doing ok. PRBLX is the winner here, running neck and neck with the S&P 500. Now let’s look at the longer time period:
This reaffirms that UMBWX should be removed, whereas the others can remain in consideration. JMCVX is hanging on at the bottom of the pack (excluding UMBWX) but we’ll let it remain for the next round of analysis.
So now we’re left with a motley crew of 10 equity fund tickers: CVGRX, FAMVX, GABSX, HFCSX, ICSLX, JMCVX, MXXIX, PRBLX, RYPRX, and WWNPX.
Now, let’s quickly take a look at those two bond funds, SRINX and WBRRX over a five year period.
As we’d expect, they are slow and steady—not achieving returns that the S&P has, but also not showing the volatility. Among these two, it’s clear that SRINX (intermediate-term bond) is preferable; WBRRX (short-term bond) is up 19.9% in 5 years, whereas SRINX is up 42.4%. While I wouldn’t expect a bond fund to shoot the lights out, I’d like to see a higher return over the five years than WBRRX is offering; I’ll remove it, and keep SRINX.
Now that I have a list of twelve tickers (ten equity funds, a money market fund, and a bond fund), what next? While Stock Rover doesn’t offer the full suite of data for mutual funds as we do for stocks, you can still find the “expense ratio” number by looking at the Summary tab in the Insight panel.
One other very important aspect of mutual funds is the expense ratio. This is essentially just the overhead—a measure of how expensive it is to run the fund. It’s calculated by dividing the fund’s operating expenses by the average dollar value of the assets over the year. When you see the expense ratio, you can just subtract it from the yearly return to figure out how much you’re actually getting (but in Stock Rover this has already been done for you, so the return you see is the return you get.) Different types of mutual funds have different ranges for a “normal” expense ratio, so Stock Rover gives not only the expense ratio for the fund but also the category average. To find the expense ratio in Stock Rover, select the stock in the table and look on the right at the Insight panel.
Here you can see that we’re looking at CVGRX—a large growth fund. Its expense ratio is 1.26%, whereas the average for its category is 1.20%, so it’s a little more expensive. Its return this year, taking into account the expense ratio, so far is 4.7% (which you can find in the chart’s legend.)
I can continue to scroll through my eleven funds and look at their return, their expense ratio, as well as the category expense ratio average and decide if the ratio is too high for the performance. I’ve used the color-coding feature in Stock Rover to sort them into three categories: green for decent performance and a smaller expense ratio than the category average, yellow for a larger expense ratio than the category average or a smaller expense ratio than average but poor price performance, and red for a larger expense ratio than the category average and poor price performance. After grouping by color you can see the results here:
From here it looks like I have some good options. There are five funds that have decent price performance and are cheaper (expense ratio-wise) than their category average. SRINX has a smaller return, but remember—that’s the bond fund, which have smaller returns.
Now I’ll take my green-colored funds and put them in a longer chart so I can see all of my best options together against the S&P. We can see in this view that PRBLX looks by far to the be the best, though ICSLX and FAMVX are doing alright. JMCVX (mid-cap value) has been left in the dust. SRINX, my bond fund, looks about as good as bond fund could against these equity funds.
Once I have a list of potential funds, like the five I have in green above, how do I allocate between them? The types of fund left are mid-cap growth (FAMV), large value (ICSLX), mid-cap value (JMCVX), large blend (PRBLX), and intermediate-term bond (SRINX). There’s also that money market fund, SWVXX, that I’d temporarily hid from view. At this point, it’s really up to personal preference. I went for large blend, mid-cap growth, and large-cap value, which exposes me to both value and growth stocks that are mid to large-sized. I was underwhelmed by JMCVX and decided to get my exposure to value stocks through the ICSLX and PRBLX. I didn’t go for the small caps because BUFSX is in a rocky downward trend, and GABSX (the small blend) was expensive and so was weeded out in the expense ratio round. Because I have a long time until retirement, I opted for 100% equities as they show stronger growth over the long-run. Lastly, the money market fund doesn’t offer a large return, particularly with the low interest rate these days, so I didn’t allocate any funds to it.
In general, it’s best to diversify across market cap (small, medium, large) and investing style (growth, value), so this means selecting several different funds that represent some or all of the different classes. A separate decision is whether to invest in equity or bonds. Because equities outperform bonds in the long run, if you’re looking at a long time horizon, then you should give more weight to equities. In fact, if you’re looking at a fifteen year time horizon (or longer), you could probably put 100% equities (as I did.)
From here, you could dive deeper into each fund—what are its holdings, who is the manager, how long has the manger been in place, etc., but that is unfortunately beyond the scope of this article. Generally it is best to go to the web site of each candidate mutual fund for this information. Morningstar is also well known for their mutual fund data, and a quick Google search will reveal many other potential resources. But from here you can set up a portfolio with the funds you’ve chosen and in the proportions you’ve chosen, and check in on it whenever you like. You can also keep a watchlist of all the mutual funds offered so you can key an eye on any of the others that may have improved their performance. But now next time you’re given a list mutual funds from your 401K, you’ll know how to begin the process of picking the good ones.