The Worst-per­form­ing Ac­tive Funds

High-fee man­aged fu­tures, en­ergy lim­ited part­ner­ships and multi-al­ter­na­tives prod­ucts topped this list.

Financial Planning - - Contents - BY AN­DREW SHILLING

High-fee man­aged fu­tures, en­ergy lim­ited part­ner­ships and multi-al­ter­na­tives prod­ucts topped this list.

The in­dus­try’s 20 worst-per­form­ing ac­tively man­aged mu­tual funds over the last three years are home to a com­bined $25.8 bil­lion in client as­sets. With fees av­er­ag­ing just over 140 ba­sis points, their poor per­for­mance num­bers came on top of a sig­nif­i­cant ex­pense to clients.

The cost of these re­turns were more than 40 ba­sis points higher than the av­er­age top-per­form­ing fund, where fees were 0.99%, Morn­ingstar Di­rect data show. Even so, the av­er­age three-year re­turn among the worstper­form­ing funds was -2.67%. A sim­i­lar list of poor-per­form­ing in­dex mu­tual funds, which posted an av­er­age re­turn of 1.28%, had an av­er­age ex­pense ra­tio of 0.19%.

“Costs are one of the most re­li­able pre­dic­tors of long-term re­turns,” says Dan Cul­lo­ton, Morn­ingstar’s di­rec­tor of man­ager re­search and eq­uity strate­gies. “It gives them a higher hur­dle to over­come. When your strat­egy, cat­e­gory or as­set class is out of fa­vor, it hurts more to in­vest be­cause not only are you down, but you’re also sur­ren­der­ing your high cost to the as­set man­ager.”

Man­aged fu­tures, en­ergy lim­ited part­ner­ships and multi-al­ter­na­tive of­fer­ings were among some of the most com­mon Morn­ingstar cat­e­gories found in this screen of funds.

“Funds like the Ea­gle MLP strat­egy, Op­pen­heimer’s Steel­path MLP strat­egy, Ivy En­ergy or In­vesco En­ergy are all just in a re­ally tough spot,” Cul­lo­ton says. “Those have been the worst-rank­ing cat­e­gories among sec­tor funds.”

Cul­lo­ton also noted that in­ter­na­tional of­fer­ings were among the worst-per­form­ing. A case in point: Two Euro­pean stock funds and one for­eign blend fund, with a com­bined $5.6 bil­lion in as­sets, found their way on the list. Over the three-year pe­riod, “the only thing worse than the Europe stock cat­e­gory [in­ter­na­tion­ally] is China, which is quite a bit worse,” he says, adding that the Euro­pean stock cat­e­gory “has been one of the poor­erper­form­ing cat­e­gories over the past one- to- three years. These are down 10%, an­nu­al­ized, over the past year.”

Lower costs is one rea­son why ETFS are so pop­u­lar, Cul­lo­ton says. “When we see ac­tively man­aged funds, par­tic­u­larly ac­tively man­aged eq­uity, the last few years have been suf­fer­ing out­flows,” he says. “When you break that down by cost, the higher cost is worse than the lower-cost funds.”

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