There is a lot to consider when investing: fees, growth vs. value, U.S. vs. international


Research suggests people comprehend at best three thoughts in any article or presentation. So here is a conveniently packaged trio of insights for investors.

Even without considering positive returns for most asset types year to date, more money is being retained in your account balance because the cost of investing continues to decline.

Morningstar recently released results of a money manager fee study that covered all U.S. mutual funds and exchange-traded funds (ETFs). On an asset-weighted basis, giving more weight to funds that manage the most money, professional management fees dropped 6 percent in 2018 compared to 2017 and are now close to 50 percent lower than 2000. Collectively, investors saved approximately $5.5 billion last year due to lower expenses. With projected future investment returns lower than the past generation, lower costs and lower inflation could help you keep more of the returns you earn.

The average actively managed mutual fund had an expense ratio of 0.67 percent while passive funds averaged 0.15 percent. Investors’ cash flow is overwhelmingly directed at less expensive offerings. In 2018, the cheapest 20 percent of U.S. funds had positive cash flow of $605 billion. The most expensive 80 percent of funds saw combined negative cash flow of $478 billion.

Of course, the averages hide the outliers. There are still some mutual funds that charge obscene management fees, even for passive index portfolios. Consider the MassMutual S&P 500 Index Fund (MMFFX). It has $3.4 billion invested at a 0.72 percent management fee. Alternatively, the Vanguard 500 Index (VFIAX) charges 0.04 percent. Yes, people (unknowingly I hope) pay a 1,700 percent higher fee for essentially the same investment.

Since the end of the Great Financial Crisis 10 years ago, U.S. stocks have substantially outperformed international stocks. Historical cycles suggest it is unlikely to continue.

Five of the past six calendar years have seen U.S. stocks lead foreign stocks, but the economic growth cycle may be approaching maturity in the United States. Abroad, where economies and investment markets are at earlier stages of typical growth cycles, international stocks could be positioned to take over performance leadership.

While U.S. stocks are, by many measures, trading at a premium compared to historical valuations, foreign stocks are relatively attractively priced. Before the current dominance of U.S. stocks on the global landscape, international stocks were more likely to lead. Going back to 1973, calendar years of market leadership are even between the S&P 500 Index of U.S. stocks and the MSCI EAFE Index of developed foreign stock markets, 23 wins apiece.

Home-country bias is evident around the globe for understandable reasons, but many U.S. investors may improve the risk/return profile of their portfolio by adding to international stocks. An allocation of two-thirds U.S., one-third international may be a good start. If your investment mix features 60 percent stocks, this would translate to 40 percent U.S., 20 percent international.

Just as recency bias has caused many U.S. investors to dismiss international stocks in favor of the better-performing U.S. stocks, many investors have overlooked value stocks with uninspiring returns compared to growth stocks.

You may wind up on the wrong side of history if you consider value investing to be dead. Sure, it may be less compelling to buy a stock or a fund that invests in companies with discounted stock prices hoping that the market will ultimately recognize the mispricing and return the price to an appropriate fair value, generating a solid return. Growth investing —buying companies that may be trading for a premium today but have strong prospects to expand their profits and justify higher-yet stock prices in the future — has the aura of innovation and a new world economy on its side.

Over the past decade, the Russell 3000 Growth Index has outperformed the Russell 3000 Value by an annual average of approximately 4 percentage points. The 10 years prior to that, however, the value side of the U.S. market had a 4.5 percent average annual lead, albeit in a lower return environment.

For a sense of the difference in value vs. growth, consider the top 10 holdings of each. The largest holdings in the value index in order are JP Morgan Chase, Berkshire Hathaway, Exxon Mobil, Johnson & Johnson, Bank of America, Proctor & Gamble, Cisco, Intel, Verizon and Pfizer. The top of the growth index features Apple, Microsoft, Amazon, Alphabet (Google, with two share classes combined), Facebook, Visa, Home Depot, UnitedHealth, MasterCard and Boeing.

Owning the whole market instead of leaning either direction is a wise strategy, just don’t ignore value stocks because they have been out of favor. Going back to the 1930s, in terms of rolling 10-year averages, U.S. value stocks have outperformed growth stocks in 83 percent of the time.

Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor.
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