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Buy the Fund Company, Not the Funds?

The adage is only partially correct.

John Rekenthaler, 10/07/2013

Two for Two
It's said that the stocks of mutual fund companies make better investments than the funds those companies manage. Certainly, the stocks have thrived. The few publicly traded mutual fund companies performed fabulously in the 1980s (Franklin and Dreyfus were among the very highest gainers of any U.S. stock for the decade), beat the market again in the 1990s, and have gained nicely in recent years, too.

For example, although T. Rowe Price TROW missed the indexing boom, including the exchange-traded fund market, its shares have gained more than 400% cumulatively over the trailing 10 years. Just a shade behind, at 370% for the trailing 10 years through Aug. 31, 2013, was Franklin Resources BEN, which not only bypassed indexing and ETFs but also the surging 401(k) marketplace. Both companies succeeded at their core task of investing--more on that shortly--but the point remains: The mutual fund industry is a generous master. Over the past five years, 4 times as many Eaton Vance EV funds have finished in the bottom quartile of its category than in the top quartile. The company's punishment? Its shares are only up 9.9% per year over the period.

In my investment lifetime, it has never been a bad time to own the stock of a mutual fund company. (I am not permitted to do so. You, on the other hand ... )

So, the first part of the saying is correct. The part about not buying the funds? Not so much. Below are the five-year numbers of the mutual funds (oldest share class) of the four largest publicly traded fund companies, listed in order of their companies' stock market capitalization. (After the top four, I've added Eaton Vance, which is quite a bit smaller than the other four, but it's a relatively pure play on the industry.) Each family's average category percentile ranking for total return over the trailing five years is shown, along with the number of funds that placed in the top and bottom quartiles of their categories over that period.


  - source: Morningstar Analysts

Good results, albeit from a small sample size. BlackRock's funds have been no better than average--but BlackRock, while the biggest overall asset manager of the listed companies, is neither the oldest nor the most prominent of the list's mutual fund managers. Those honors belong to Franklin and T. Rowe Price, which have respectively been very good and excellent.

T. Rowe Price in particular deserves mention. Placing 47 funds in the top quartile for the trailing five years and only five funds in the bottom quartile is a highly impressive feat. (Industry leader Vanguard, for example, which has dominated the sales charts over that time period, has 38 funds in the top quartile and seven in the bottom.) While T. Rowe rarely performs that well--which fund company does?--the showing is nevertheless typical of the firm, which chugs along decade after decade with quietly strong, scandal-free results.

Then comes Invesco IVZ near the averages. Finally, as previously mentioned, Eaton Vance has very much struggled.

is vice president of research for Morningstar.

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