Your typical experience in an actively managed mutual fund is to under-perform the exchange traded fund (ETF) that tracks the most relevant benchmark while paying higher fees and taxes. For these reasons, mutual funds are dying a slow death.
Neither you nor your advisor knows which actively managed mutual fund will beat the benchmark next1. The data2 overwhelmingly shows the odds are not in your or your advisor’s favor. What is certain is you will pay a fee to the fund manager enabling them to play the outperformance game on your behalf. In addition, if an advisor recommended the fund to you, you will be paying them an advisory fee on top of the manager’s fee.
This time of year you will be reminded of the lack of tax efficiency in your actively managed mutual funds. The funds are required to distribute gains they realized during the year to you. The gains can come from two main activities: active trading or having to sell to meet redemptions. It does not matter whether you have lost money in the fund or have not changed anything. You may still be hit with capital gains. The result of investors moving from mutual funds toward ETFs over time will result in higher redemptions for the funds and therefore, higher corresponding capital gains distributions for you.
It is up to you to verify your advisor is doing what is in your best interest. Ask questions. Why continue a practice when the data says it has a negative expectation versus the appropriate ETF? For whom do you invest? Me or the fund companies?
Here’s what you can do: Sell any actively managed fund that has unrealized loss or small unrealized gain. Sell any actively managed funds in tax-free or tax-deferred accounts (Roth IRA, IRAs, etc…). Do not buy any actively managed funds moving forward. Instead, invest using low-fee, tax-efficient ETFs.
1 Confirm this by requesting the performance of all your accounts since inception of your account versus a blended benchmark weighted by your allocation over time net of all fees (manager fees and advisory fees).
2 Supporting data can be found here: https://us.spindices.com/documents/spiva/persistence-scorecard-march-2018.pdf?force_download=true