Ashake-up among the biggest U.S. mutual funds points to shifting sands in the markets at large. After a five-year reign as the world's largest mutual fund, Pimco's Total Return fund (PTTRX) has been eclipsed by Vanguard's Total Stock Market Index fund (VTSMX) - a shift that's largely due to the bond market's lackluster performance, says Morningstar fund analyst Michael Rawson. "It's a reflection of the strong equity market compared to the flat bond market."
The Pimco offering is, of course, a core bond fund, and the Vanguard fund, which Rawson describes as the quintessential core equity fund, covers virtually the entire U.S. equity market, holding more than 3,500 stocks.
The Pimco fund showed an anemic 1.62% return for three months ended Oct. 31, and a loss of 0.18% for the 12-month period; the Vanguard fund, by contrast, was up 4.99% for the three-month period and 28.74% for the year. But it's not just performance: Pimco has seen outflows of more than $30 billion in recent months, dropping its net asset value to just under $248 billion; the Vanguard fund now has net assets of nearly $288 billion.
And there's another issue: Rawson views Vanguard's new dominance as "significant in that it is a passive fund overtaking an active fund." Passive funds generally benefit from large size, since it helps them spread fixed costs over greater assets and lower the expense ratio. "It is also a victory for low-fee investing," he says. Vanguard's cost is 0.17%, while Pimco's cost comes to 0.46%.
The appeal of index offerings is reflected in the most recent Morningstar performance rankings. (Click to see data.)
Of the 10 largest equity funds tracked by Morningstar, six fall into the index category, including five Vanguard offerings; the sixth, Fidelity Spartan 500 Index (FUSEX) has expenses of 0.10% and generated returns of 4.73% for the three-month period and 27.06% for the year.
Elsewhere, gold and precious metals funds have failed to regain any of their previous luster. These funds continue to dominate Morningstar's worst-performing list with Van Eck International Investors Gold (INIVX) showing the biggest losses - down 4.74% for the three-month period and off 47.85% for the year.
Multi-currency and small-cap funds have been getting some attention lately - although Rawson doesn't have much use for either of these asset categories. "Currencies are not a productive asset and hence there is not much return potential in currencies," he says. "They generally barely keep up with inflation. ... You can get a better return by investing in foreign currency short-term bonds."
Small-caps, meanwhile, he views as too expensive. "The 10.7% annualized return of the Morningstar small-cap index easily outpaced the 7.6% annualized return of the S&P 500 Index over the past decade," he says. "But small-caps now command a premium valuation. Currently, large-caps trade at a price/projected earnings ratio of around 15, while small-caps trade at a multiple of about 19 times prospective earnings."
Another asset class that has taken off in recent months is emerging market diversified stock funds, which have been attracting a flood of new assets. But there are some major differences investors must weigh carefully in evaluating these investments, says Morningstar senior analyst Patricia Oey.
These funds can encompass as many as 22 different countries, with variations that can be significant, Oey says. "For example, the Malaysia and Taiwan markets are up 8% to 10%" year to date as of early November, she says, "while Turkey is down almost 10%."
Laton McCartney is a New York writer who has contributed to Money Management Executive and Information Management.