In part one of this series (View Article), we examined the performance of the most popular mutual funds in the largest accounts in the Advisor Perspectives (AP) universe (View Data).  Our hypothesis was that RIAs, when choosing mutual funds for these large accounts, would select funds that would outperform relative benchmarks.  The data from part one of this study examined the 25 most popular funds, based on these funds’ market value in the AP universe, and showed the following:

• Funds, in general, outperformed their specific benchmarks.  Of the 18 actively managed funds (i.e., excluding index funds and ETFs), 11 outperformed their specific benchmark.
• Actively managed funds ranked in the 47th percentile of their peer groups, based on a weighted average of each fund’s ranking (weighted by the market value of the fund in the study)
• If an investor held a diversified portfolio of the taxable funds in this group, weighted by the funds’ market values, the return would have been 5.46%, with a standard deviation of 8.96.  Over the second quarter of this year, the S&P 500 returned 6.26% with a standard deviation of 7.39.  Such a portfolio would have nearly half its assets in non-US securities.

In part two, we examine the performance of the 25 most popular funds (based on market value in the AP universe) in the largest accounts in each of four separate categories:

• US equities
• US taxable fixed income
• US municipal fixed income
• Foreign equities

We test the same hypothesis – Do RIAs pick superior performing mutual funds for their largest accounts?  In this analysis, we examine how RIAs fare in picking funds in each of the above four categories.  As with part one, this study encompasses a very short time period (one calendar quarter), and we will revisit this analysis over a number of subsequent time periods to see whether the results persist.  In particular, we will watch to see if the top performing funds are consistent from quarter-to-quarter, which would provide an additional level of confidence in the results.

A summary of the data is presented in the two tables below:

The data for the individual funds in each of these four groups is shown in the PDF file accompanying this article.

The Active Portion of each group consists of the actively managed mutual funds, and excludes index funds and ETFs.

Based on this data, we conclude the following:

• RIAs are most adept at picking funds in the US Municipal and Foreign Equities markets.  Of the 25 actively managed US Muni funds, 16 outperformed their primary benchmark (the LB Municipal index), and of the 22 actively managed Foreign Equity funds, 16 outperformed their primary benchmark (either the MSCI Developed or Emerging index, or – in one case – a Dow Jones global index).  A weighted average of actively managed muni funds outperformed their primary benchmark by .43%, and a weighted average of actively managed Foreign Equity funds outperformed their primary benchmark by 1.69%.  These funds do not have significantly more risk, as measured by standard deviation, in comparison to their benchmarks.   The weighted average of US Muni funds were in the 34th percentile of their peer group, and the weighted average of Foreign Equity funds were in the 49th percentile.
• RIAs were less impressive in picking US Equity funds, where 9 of 16 actively traded funds outperformed their primary benchmark and a weighted average of these funds underperformed their primary index by .23%.  These funds were in the 43rd percentile.  The US equity funds as a whole (including actively managed funds, index funds, and ETFs) underperformed the S&P 500 by 275 basis points.

The above two findings are consistent with our earlier study (View Article), which showed that RIAs use mutual funds much more extensively in the non-US markets (as compared to the US markets) in the largest accounts in the AP universe.  The corollary is that RIAs use separately managed accounts (SMAs) for US markets, and use mutual funds for US equities to fill in ‘holes’ where an appropriate manager cannot be found for a particular style box.  The data above shows that actively managed US equity funds outperformed their secondary benchmark (which corresponds to a particular style box) by .37%.  That is to say, US equity funds selected by RIAs do not outperform the broader US equity markets, but they do outperform the particular style box for which they are selected.

RIA usage of municipal bond funds is significantly greater than taxable bond funds (approximately $362 million versus $270 million for the funds used in this study).  The greater focus on municipal bonds may explain the difference in fund performance in these categories.  Actively traded US taxable fixed income funds performed in the 56th percentile, with 12 of 22 funds outperforming their primary benchmark.  Taxable bond funds outperformed their primary benchmarks by .28% and their secondary benchmarks by .30%.

Display article as PDF for printing.

Would you like to send this article to a friend?