Best mutual funds operated cheaply and invest passively

Expenses and investment style matter to investors looking for the highest gains on stock mutual funds, according to a recent survey by Investment News. Dimensional Fund Advisors (DFA) of Santa Monica, California, turned in the best overall stock mutual fund performance among its peer group of the largest 25 mutual fund companies, the trade publication reported.

Investment News weighted the returns of individual funds offered by each of the companies by the dollars invested in each fund. DFA’s stock funds earned an average one-year return of 20.61% for the year ended Sept. 30, 2005, the publication said. The company beat American Funds, Vanguard, Fidelity,Franklin, Merrill Lynch, American Century, T. Rowe Price, Morgan Stanley, MFS, and Putnam, among others. The company’s stock funds turned in an asset-weighted return of 23.38% in 2004 and 36.4% in 2003, the publication said.

DFA did not win the competition because it offered superior stock-picking talents or an ability to time the market. The company invests exclusively in a passive manner, meaning its funds concentrate on specific areas of the markets and hold almost all stocks available in each of those markets. DFA’s managers do not buy or sell stocks based on forecasts of earnings or of growth prospects. Most of its major competitors—with the exception of Vanguard, which also offers a roster of passive funds—expect their fund managers to use their “skills” to pick winning stocks. DFA’s funds also operate at low expense levels, in some cases as low as 0.15% of assets, compared to some competitors’ funds with expenses as high as 2%.

(Note: Sparrow Wealth Management invests portions of its clients’ accounts in DFA funds.)