3 Key (But Often Overlooked) Mutual Fund Return Statistics

Anyone who knows me knows that the minute I see a “Top” or “Best” list with regards to financial advisers or investments, I immediately want to do a detailed forensic analysis to substantiate or disprove such claims. As a plaintiff’s securities/ERISA, my attention is always drawn to the criteria that was used, or not used, in awarding such designations.

With financial advisers, the first question I always have is a simple one – did a financial adviser have to pay anything to be considered for the list. If so, that list has no value in my opinion due to the obvious conflict of interest issues with any “pay-to-play” requirement. No matter how much the creator of the list may claim such payment had no impact on the decision regarding inclusion on the list, such claims ring hollow, otherwise why have the payment requirement at all.

With financial advisers, a second often used, but questionable/debatable factor, is the amount of the adviser’s assets under management (AUM). The rationale often given for considering an adviser’s AUM is that it shows the return that an adviser has produced for his clients. Not quite. If AUM says anything, it demonstrates how effective an adviser is marketing their practice since AUM includes money brought in by new accounts. A new multi-million dollar account (or two) definitely impacts AUM, but proves nothing with regard to an investment adviser’s money management skills. Far too often I see investment advisers placing a client’s money in actively managed mutual funds with excessive fees and/or a history of consistent underperformance relative to a comparable, yet less expensive, index fund. This leads to our first often overlooked, yet key, mutual fund static.

Load-Adjusted Returns

With investments, the decision is often based on criteria such as annualized return. Nothing wrong with using annualized return as a criteria for evaluation as long as the proper annualized return numbers are being used. Far too often, “top/best” list creators, as well as investors, plan sponsors and other investment fiduciaries, are not using the proper annualized return numbers, and they up with invalid evaluations.

Index funds do not charge a fee just to invest in their funds. Actively managed mutual funds do charge investors such a fee, commonly referred to as front-end load, just to invest in their funds. Some actively managed mutual funds offer other types of potential fees, such as back-end loads, that may or may not apply depending on whether an investor withdraws all or part of their investment in the fund prior to a specified period of time.

Funds that charge a front-end load immediately reduce an investor’s investment in the fund as soon as they make their investment. Consequently, an investor in such as fund starts in a hole, as they will always earn less than in investor investing the same initial amount in an index fund earning the same annualized return over the life of the investment.

Most investors and investment fiduciaries are not aware of the potential impact of a front-end load on a fund’s performance. Mutual fund ads for actively managed funds typically reference annualized returns that have not been adjusted for the impact of the fund’s front-end load in order for their performance to appear to be competitive with comparable, less expensive, index funds. Actively managed mutual funds are required to disclose their load-adjusted returns annually in their fund’s prospectus and summary prospectus. But, how many investor’s actually read either of these documents or calculate the difference in monetary returns? Exactly.

I recently read a post on LinkedIn from the CEO of one of the largest mutual fund companies in America. His company’s funds are typically named as among the most popular funds, in both pension and non-pension accounts. In his post, he was naturally extolling the value of his fund and historical performance.

But his retail funds charge one of the highest fees charged in the industry. As a result, I have to wonder whether he was basing his remarks on the funds’ load-adjusted or non-adjusted annualized returns. For example, his most popular retail fund reported 5-year unadjusted and load adjusted returns of 15.03% and 13.68%, respectively, over the period 2012-2016. Based on an initial investment of $100,000, this would have resulted in an ending balance for the investor of $201,398 to 189,854, respectively, over that time period.

Over that same period, an investment in a comparable large cap growth no-load fund, the Vanguard Growth Index Investor fund, had a 5-year annualized return of 13.90%, for a ending balance of $191,698. Over that same period, an investment in the Vanguard S&P 500 Investor fund, would have resulted in a ending balance of $196,715.

Over 10-year period 2007-2016, that same fund reported unadjusted and load-adjusted annualized returns of 6.94% and 6.31%, respectively. Based on an initial investment of $100,000, this would have resulted in an ending balance over that period of $195,614 and  $184,391, respectively

Over that same 10-year period, an investment in a comparable large cap growth no-load fund, the Vanguard Growth Index Investor fund, had a 10-year annualized return of 7.99%, for an ending balance of $215,692. Over that same period, an investment in the Vanguard S&P 500 Investor fund, with an 10-year annualized return of 6.82%, would have resulted in a ending balance of $193,430.

I apologize for all the numbers, but I know some readers use them to verify my arguments and in their personal practices. At least that’s what I have been told.

So, the first key statistic that investors and investment fiduciaries should look for is an actively managed fund’s annualized load adjusted return. As I mentioned earlier, mutual funds that charge front-end sales charges are required to report the fund’s load-adjusted returns for both the most recent 5 and 10-year periods. Most mutual fund update their prospectus around the middle of the year. Load adjusted returns can also be found by searching under such terms as “VFINX (for Vanguard’s S&P 500 fund) 2016 5-year load adjusted returns.”


The second often over-looked key statistic for a mutual fund is the fund’s R-Squared number. R-squared has been defined as a “measurement of how closely a portfolio’s performance correlates with the performance of a benchmark index, such as the S&P 500, and thus a measurement of what portion of its performance can be explained by the performance of the overall market or index” instead of actively managed fund’s management team.

An actively managed fund’s R-squared number is often used to determine whether the fund qualifies as a “closet index,” fund, or an “index hugger.” A closet index fund is a fund that charges investor’s a relatively high annual expense fee, but essentially tracks the performance of a comparable, yet much less expensive, index fund. Actively managed funds started employing this strategy in order to avoid significant variances in performance which could result in their investors leaving for a comparable index fund.

While there is no universally accepted R-squared that denotes a closet index fund, most people use 90 or 95 as the line of demarcation, although others even use lower R-squared numbers. An R-squared number of 90, it can be argued, indicates that active management is only contributing to 10 percent of the fund’s performance, resulting in investors severely overpaying for the fund’s active management component.

A fund’s R-squared number is available at Morningstar’s web site (morningstar.com) on the fund’s page under the “Ratings and Risk” and “MPT Statistics” tabs.

The Active Expense Ratio

This over payment for an actively managed fund’s active contribution leads us to the third often overlooked key statistic for a mutual fund – the fund’s effective annual expense ratio, also known as the fund’s Active Expense Ratio (AER). The Active Expense Ratio metric was created by Professor Ross Miller as a means of measuring the extent to which investors are potentially overpaying for the limited contribution of an actively managed fund’s management team. Using an actively managed mutual fund’s R-Squared number and the incremental, or additional, cost of the actively managed fund’s expense ratio, Professor Miller found in many cases, actively managed funds are effectively charging their investors annual expense ratios significantly higher than the fund’s stated annual expense ratio, in most cases fees 3-4 times the fund’s stated rate, in some cases even higher.

The actively managed fund that I have using as an example has a stated annual expense ratio of 0.66 percent and a 5-year R-squared of 88.85. Once again, using the Vanguard Growth Index Investor fund as our benchmark, result in an AER of 1.91, approximately three times the fund’s stated annual expense ratio. Using the fund’s 10-year R-squared of 93.38 results in an AER of 2.57, approximately four times the fund’s stated annual expense ratio.

For more information about the Annual Expense Ratio and the calculation process, click here.


Costs obviously matter, as they reduce an investor’s end return. Each additional 1 percent in a fund’s fees and expenses reduces an investor’s end return. Over twenty years, each additional 1 percent in fees and expenses reduces an investor’s end return by approximately 17 percent. A fund’s R-squared number and its AER can provide valuable information to help investors and investment fiduciaries improve the performance of their portfolios by avoiding unnecessary expenses to create and maintain cost efficient investment portfolios.

An actively managed mutual fund’s load adjusted annualized return its R-squared and the three pieces of data required to calculate the fund’s Active Expense Ratio are all freely available online. Those willing to invest a little time in gathering such information and making the evaluations should be rewarded with greater financial security and the peace of mind that brings, as well as the ability to spot the bogus “top” and “best” investment lists.


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