It might seem ungrateful to find fault with a mutual fund that has racked up gains well into the double digits for each of the past two calendar years as well as the current year to date.But then, any fund charging considerably more than the "going rate" for "just average" results deserves some serious attention. An investor with the foresight to be in a mutual fund matching the performance of the broadly diversified international MSCI EAFE index at the end of 2004 would have enjoyed an impressive gain -- 64.3% to be exact -- between then and Sept. 30 of this year. A number of open-end index funds that efficiently track the EAFE benchmark have rewarded their holders with gains of that magnitude. They have generally done so while incurring expenses that amount to a small fraction of a percentage point. But there are also a number of funds tracked by TheStreet.com Ratings that do not promote themselves as international index funds that have turned in performances close to the EAFE gauge since the end of '04. TheStreet.com Ratings database was queried for funds whose cumulative, absolute differences from EAFE index returns for the past two calendar years and the year to date (through Sept. 30) amounted to less than three percentage points. The 10 funds on the accompanying table popped up. All 10 funds are up between 12% and 14% so far this year, compared with the EAFE's 13.57% advance. For calendar 2006, the funds' performances are all in the vicinity of 25% to a shade over 28%, vs. 26.86% for the EAFE. And for 2005, they were all in the 13% to 14% area, all within a breath of EAFE's 14.02% gain. It doesn't take an international espionage agent to suspect that some of these funds are content to just "go along for the ride" with the EAFE while saddling their holders with expense ratios that are more appropriate for actively managed investments. Passively managed index funds can charge lower fees than actively managed funds because they don't have to research the companies they invest in. Passively managed funds also tend to turn over their holdings less frequently, thus saving on transaction expenses. Consequently, the average actively managed equity fund tracked by TheStreet.com Ratings burdens its holders with a total expense ratio of 1.95% while the average equity index fund only requires 0.76% for total expenses. The savings can be even bigger: A number of index funds require less than 0.10% for expenses, with one as low as 0.05%. Expenses for international funds are generally in line with those that focus on domestic investments. While six of the 10 funds have edged out the EAFE so far in 2007, only four managed to beat the international gauge in calendar 2006, and an equal number outpaced the EAFE in 2005. So much for the rewards of "active" management. A single fund, the ( GCIAX) Goldman Sachs Structured International Equity Fund (GCIAX), managed to stay fractionally ahead of the EAFE index for all three periods. The fund's largest holdings are BASF ( BAS) and Deutsche Bank ( DB). Both stocks are among the 50 largest components of the EAFE index. For comparative purposes, a true international index fund, the ( FSIIX) Fidelity Spartan International Index Fund (FSIIX), appears at the bottom of the table. Because it is not trying to outperform the EAFE benchmark, investors are spared the expense of investment research. They also avoid the elevated transaction costs usually rung up by managers who shuffle portfolios in their stalking of stocks that they hope will outperform the market.
|International Suspects |
The performance of these funds is suspiciously close to the MSCI EAFE index
|Name, Ticker & TheStreet.com Ratings Grade||Yr. to Date Ret'n (%)||Cal. 2006 Ret'n (%)||Cal. 2005 Ret'n (%)||Expense Ratio (%)||Min. Initial Investment|
|Dreyfus Founders Intl Equity A (FOIAX) A||14.37||25.20||13.93||1.42||$1,000|
|Dreyfus Premier Intl Growth A (DRGLX) A||14.18||25.32||13.80||1.44||$1,000|
|Goldman Sachs Stru Intl Eq A (GCIAX) A-||13.71||27.28||14.68||1.25||$1,000|
|Huntington International Equity A (HIEAX) B+||14.96||26.77||14.22||1.82||$1,000|
|JennDry Dryden Intl Equity A (PJRAX) A-||13.61||25.67||13.16||1.28||$2,500|
|JPMorgan Intrepid Int A (JFTAX) B+||13.49||25.58||13.75||1.64||$1,000|
|Munder International Equity A (MUIAX) B+||12.07||27.80||14.31||1.44||$2,500|
|Putnam Intl Growth & Inc A (PNGAX) B+||12.76||27.52||14.66||1.33||$500|
|Russell International Securities A (RISAX) B+||14.32||25.08||13.89||1.47||$1,000|
|UBS PACE Intrntl Eq Inve A (PWGAX) B+||13.89||28.09||13.68||1.47||$1,000|
|MSCI EAFE Index||13.57||26.86||14.02|
|S&P 500 Composite Total Return||9.13||15.8||4.89|
|A True MSCI EAFE Index Fund|
|Fidelity Spartan Intl Index Inv (FSIIX) A+ *||13.25||26.15||13.73||0.20||$10,000|
|* Fund's expense ratio "capped" at 0.10%. |
Data as of 9/30/2007.
Source: TheStreet.com Ratings.