Finding the right fund – Part 3

Steve Merrell |

This is the third and final installment in my “finding the right fund’ series. In the past two installments I discussed the importance of good information sources when researching mutual funds. I also shared some of the key metrics I use when evaluating a fund. This week I will show you how to pull it all together using two actual funds: Vanguard’s Total Stock Market Index fund and the Lazard Global Listed Infrastructure Fund.

Before we get into the details, please keep in mind that this is not an investment recommendation. I personally invest in both of these funds, but they may not be appropriate for you given your unique situation.

Let’s start with the fund prospectuses. Reading the prospectuses reveals that both funds have multiple share classes. The Lazard fund has three: Institutional shares (GLIFX), open shares (GLFOX) and retirement plan shares (RLGLX). The Vanguard fund has two share classes: Investor shares (VTSMX) and Admiral shares (VTSAX). The only real difference between the share classes is their cost.

The Lazard institutional shares (GLIFX) catch my eye because they have a much lower expense ratio than the open shares (0.96% vs. 1.21%)—the difference being the presence of a 0.25% 12b-1 fee on the open shares. Digging deeper into the prospectus, I discover that GLIFIX requires a minimum investment of $10,000, while open shares require an investment of only $2,500.

The Vanguard Admiral shares (VTSAX) also catch my eye because they have an expense ratio of 0.04% compared to 0.14% for the investor share class. VTSAX requires a minimum investment of $3,000, while investor shares can be purchased with an investment of $1 or more.

According to the prospectus, GLIFX invests primarily in stocks with a minimum market capitalization of $250 million.  At least 80% of its equity investments will be in utilities, pipelines, toll roads, airports, railroads, ports, telecommunications and other infrastructure companies. I further learn that the manager seeks to hedge a substantial portion of the fund’s foreign currency exposure.

From the Lazard website, I download a copy of the fund’s holdings as of March 31, 2020. The portfolio has only 26 investments and all but six are located outside of the United States. I also learn that the fund has 18 percent of its value invested in a short-term money market fund. I can see this is a highly concentrated, actively managed portfolio.

VTSAX, on the other hand, is a passively managed index fund that seeks to deliver returns in line with the overall U.S. stock market. I download its holdings also—all 3,513 stocks—and find nothing to surprise me. Both funds invest in securities that I understand and feel comfortable holding.

We next turn to Morningstar to gain deeper insight into the metrics of each portfolio. For example, GLIFX’s expense ratio of 0.96 percent is high compared to the 0.04 percent ratio for VTSAX. However, Morningstar shows that GLIFX is just about average when compared with other specialty funds. That doesn’t make it a bargain, but at least we know we aren’t way off the market when compared with other funds. VTSAX, on the other hand, is cheap compared to its peers. The average expense ratio for a U.S. large cap institutional fund is 0.72 percent, almost 20 times higher than VTSAX.

We look at performance and see that GLIFX has consistently performed in the top quartile of its peer group. However, because it owns only 26 stocks, it is high risk and any investment we make in GLIFX must be small—no more than 10 percent of the overall portfolio. 

Comparing the upside/downside capture ratios reveals each fund’s price risk. VTSAX has an upside capture ratio of 101 and a downside capture ratio of 105, meaning it is slightly more sensitive to downside moves in the market. With upside/downside capture ratios of 49 and 45 respectively, GLIFX, is much less sensitive to market moves overall, but has slightly more upside sensitivity.

So, which is the right fund? The answer depends on what you are trying to accomplish in your portfolio. The right fund for you will be the fund that invests in securities you can understand, delivers acceptable returns at a risk level that is consistent with your goals. And, of course, the right fund will do all this with a low expense ratio.

 

 

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.