Assets in actively managed mutual funds have been a consistent source of revenue growth for Wall Street banks. But would investors have been better off in passively managed funds? I’ll answer that question for Wells Fargo and then for the group consisting of the four largest banks.
In an April column, New York Times reporter Nathaniel Popper noted that, over the last few years, an expanding line of mutual funds created by big Wall Street banks (Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo) has been drawing billions of dollars from investors.
There is a crucial question for investors: Have the actively managed mutual funds now offered by these banks actually been good investment choices?
In previous articles, I examined the performance of funds managed by Goldman Sachs, JPMorgan Chase and Morgan Stanley. This article looks at the funds managed by the final bank Popper discussed in his article, Wells Fargo. The analysis for this article was completed a couple of months ago, at the same time comparative analyses were undertaken for the other commercial banks covered in this series.
Popper noted that in the past 10-year period, Morningstar data showed that just 25% of Wells Fargo’s mutual funds outperformed their analyst-assigned benchmarks. According to Morningstar, as of July 31, 2015, Wells Fargo had more than $122 billion in assets under management in mutual funds, up from less than $90 billion at the end of 2011.
Active versus passive
As is my practice, I’ll compare the performance of actively managed equity funds offered by Wells Fargo to the similar funds from two prominent providers of passively managed funds, Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)
To keep the list to a manageable number of funds and to make sure I examine long-term results through full economic cycles, I’ll cover the 15-year period from April 2000 through March 2015. I’ll use the lowest-cost shares when more than one class of fund is available for the full period. In cases where Wells Fargo has more than one fund in an asset class, I will use the average return of their funds in the comparison.
The table below shows the performance of 17 mutual funds managed by Wells Fargo in seven asset classes – 14 domestic funds and three international funds.
April 2000-March 2015
|
Fund
|
Symbol
|
Annualized Return (%)
|
Expense Ratio (%)
|
|
U.S. Large Growth
|
|
|
|
|
Wells Fargo Advantage Premier Large Company Growth I
|
EKJYX
|
3.5
|
0.70
|
|
Wells Fargo Advantage Omega Growth Administrator Class
|
EOMYX
|
3.6
|
1.05
|
|
Wells Fargo Advantage Growth I
|
SGRNX
|
4.0
|
0.75
|
|
Wells Fargo Advantage Capital Growth Investor
|
SLGIX
|
4.6
|
1.17
|
|
Wells Fargo Advantage Large Cap Growth Investor
|
STRFX
|
1.0
|
1.13
|
|
Wells Fargo Average
|
|
3.3
|
0.96
|
|
Vanguard Growth Index
|
VIGIX
|
3.2
|
0.08
|
| |
|
|
|
|
U.S. Large Value
|
|
|
|
|
Wells Fargo Advantage C&B Large Cap Value Investor
|
CBEQX
|
7.8
|
1.20
|
|
Wells Fargo Advantage Disciplined U.S. Core Administrator Class
|
EVSYX
|
4.7
|
0.74
|
|
Wells Fargo Advantage Large Company Value Investor
|
SDVIX
|
6.0
|
1.16
|
|
Wells Fargo Average
|
|
6.2
|
1.03
|
|
DFA Large Cap Value I
|
DFLVX
|
8.7
|
0.27
|
|
Vanguard Value Index I
|
VIVIX
|
5.7
|
0.08
|
| |
|
|
|
|
U.S. Mid Cap Growth
|
|
|
|
|
Wells Fargo Advantage Enterprise A
|
SENAX
|
1.6
|
1.18
|
|
Wells Fargo Advantage Opportunity Investor
|
SOPFX
|
5.9
|
1.23
|
|
Wells Fargo Advantage Common Stock Investor
|
STCSX
|
7.6
|
1.30
|
|
Wells Fargo Advantage Discovery Investor
|
STDIX
|
9.8
|
1.28
|
|
Wells Fargo Average
|
|
6.2
|
1.25
|
|
Vanguard Extended Markets Index I
|
VMGRX
|
6.3
|
0.08
|
| |
|
|
|
|
U.S. Small
|
|
|
|
|
Wells Fargo Advantage Small Cap Opportunity Administrator Class
|
NVSOX
|
10.6
|
1.22
|
|
DFA U.S. Small Cap
|
DFSTX
|
9.0
|
0.37
|
|
Vanguard Small Cap Index I
|
VSCIX
|
8.4
|
0.08
|
| |
|
|
|
|
U.S. Small Value
|
|
|
|
|
Wells Fargo Advantage Special Small Cap Value Administrator Class
|
ESPIX
|
11.0
|
1.09
|
|
DFA U.S. Small Cap Value I
|
DFSVX
|
11.2
|
0.52
|
|
Vanguard Small Cap Value Index I
|
VSIIX
|
10.7
|
0.08
|
| |
|
|
|
|
International Large
|
|
|
|
|
Wells Fargo Advantage International Equity I
|
WFENX
|
3.5
|
0.84
|
|
Wells Fargo Advantage Diversified International Administrator Class
|
WFIEX
|
1.1
|
1.25
|
|
Wells Fargo Average
|
|
2.3
|
1.05
|
|
DFA International Large Cap
|
DFALX
|
3.0
|
0.28
|
|
Vanguard Developed Markets Index Admiral
|
VTMGX
|
3.0
|
0.09
|
| |
|
|
|
|
Emerging Markets
|
|
|
|
|
Wells Fargo Advantage Emerging Markets Equity Administrator Class
|
EMGYX
|
7.9
|
1.49
|
|
DFA Emerging Markets
|
DFEMX
|
7.5
|
0.56
|
|
Vanguard Emerging Markets Index Investor
|
VEIEX
|
7.4
|
0.33
|
The following is a synopsis of the most important takeaways from the data in the above table:
- In the five asset classes for which there are comparable DFA funds, the Wells Fargo funds provided a higher return in two. In the two asset classes in which Wells Fargo outperformed, the average outperformance was 1.0%. In the three asset classes in which Wells Fargo underperformed, the average underperformance was 1.1%.
- In the seven asset classes for which there are comparable Vanguard funds, the Wells Fargo funds provided a higher return in five. In the five asset classes in which Wells Fargo funds outperformed, the average outperformance was 0.8%. In the two asset classes in which the firm underperformed, the average underperformance was 0.4%.
- A Wells Fargo portfolio, equal-weighted in the five asset classes for which there are comparable DFA funds, returned 7.6% a year. The average expense ratio of the funds in the portfolio was 1.13%. A DFA portfolio, equal-weighted in the same five asset classes, returned 7.9% a year, outperforming the comparable Wells Fargo portfolio by 0.3 percentage points a year. The average expense ratio of funds in the DFA portfolio was 0.40%. Note that the underperformance of the Wells Fargo portfolio is more than fully explained by the difference (0.73 percentage points) in the average fund expense ratios.
- In the seven asset classes for which comparable Vanguard funds were available, an equal-weighted portfolio of Wells Fargo funds returned 6.8% a year. The average expense ratio of funds in the portfolio was 1.16%. A Vanguard portfolio, equal-weighted in the same seven asset classes, returned 6.4% a year, underperforming the Wells Fargo portfolio by 0.4 percentage points. The average expense ratio of funds in the Vanguard portfolio was 0.12%.
Factor analysis
I’ll now take another look at the performance of the Wells Fargo funds, this time using the analytical tools and data available at Portfolio Visualizer.
The following table shows the results of a three-factor (beta, size and value), four-factor (adding momentum) and six-factor (adding quality and low beta) analysis of the firm’s domestic funds (excluding the real estate fund).
The data below covers the same 15-year period, from April 2000 through March 2015. The t-stats are in parentheses.
April 2000-March 2015
|
Fund
|
Symbol
|
Three-Factor Annual Alpha
(%)
|
Four-Factor Annual Alpha (%)
|
Six-Factor Annual Alpha (%)
|
|
Wells Fargo Advantage Premier Large Company Growth I
|
EKJYX
|
-1.3
(-0.7)
|
-1.7
(-0.9)
|
-0.1
(0.0)
|
|
Wells Fargo Advantage Omega Growth Administrator Class
|
EOMYX
|
-0.6
(-0.4)
|
-1.0
(-0.6)
|
-0.7
(-0.4)
|
|
Wells Fargo Advantage Growth I
|
SGRNX
|
-0.2
(-0.1)
|
-1.0
(-0.5)
|
-0.6
(-0.3)
|
|
Wells Fargo Advantage Capital Growth Investor
|
SLGIX
|
0.5
(0.3)
|
-0.3
(-0.2)
|
-1.2
(-0.8)
|
|
Wells Fargo Advantage Large Cap Growth Investor
|
STRFX
|
-1.5
(-1.0)
|
-2.3
(-1.7)
|
-1.4
(-0.9)
|
|
Wells Fargo Advantage C&B Large Cap Value Investor
|
CBEQX
|
2.9
(2.0)
|
3.4
(2.5)
|
0.4
(0.3)
|
|
Wells Fargo Advantage Disciplined U.S. Core Administrator Class
|
EVSYX
|
0.6
(1.1)
|
0.6
(1.1)
|
-0.1
(-0.2)
|
|
Wells Fargo Advantage Large Company Value Investor
|
SDVIX
|
0.1
(0.1)
|
0.1
(0.1)
|
-1.9
(-1.2)
|
|
Wells Fargo Advantage Enterprise A
|
SENAX
|
-2.3
(-0.9)
|
-4.0
(-2.1)
|
-0.6
(-0.3)
|
|
Wells Fargo Advantage Opportunity Investor
|
SOPFX
|
0.1
(0.1)
|
0.6
(0.5)
|
-0.9
(-0.6)
|
|
Wells Fargo Advantage Common Stock Investor
|
STCSX
|
1.3
(0.9)
|
1.6
(1.2)
|
1.3
(0.9)
|
|
Wells Fargo Advantage Discovery Investor
|
STDIX
|
3.4
(1.6)
|
2.6
(1.3)
|
0.7
(0.3)
|
|
Wells Fargo Advantage Small Cap Opportunity Administrator Class
|
NVSOX
|
3.4
(2.4)
|
2.9
(2.2)
|
1.4
(1.0)
|
|
Wells Fargo Advantage Special Small Cap Value Administrator Class
|
ESPIX
|
1.5
(1.0)
|
1.3
(0.9)
|
-1.8
(-1.2)
|
|
Average
|
|
0.6
|
0.2
|
-0.4
|
When we examine the results of the three-factor analysis, we find that nine of the 14 Wells Fargo funds generated positive annual alphas, though just one was statistically significant at the 5% level. The average annual alpha was 0.6%.
When we look at results of the four-factor analysis, we find that eight of the 14 Wells Fargo funds generated positive annual alphas. Two funds that had positive alphas and one that had negative alpha were statistically significant at the 5% level. The average annual alpha was 0.2%.
When we include all six factors, we find that just four of the 14 Wells Fargo funds generated positive annual alphas, and none were statistically significant at the 5% level. The average annual alpha was now -0.4%.
The devil is in the details
Some readers may well be wondering how a fund such as Wells Fargo Advantage Capital Growth Investor (SLGIX) could outperform the passively managed Vanguard fund in the same asset class (VIGIX), yet show a six-factor alpha of -1.2%.
The answer is that while it had higher expenses (more than 1 percentage point) it also generally had higher loadings on factors that posted premiums. You can see this as we evaluate some of the data. This analysis is based on returns data for the premiums through February 2015, and returns for the quality or low-beta premiums are not included.
SLGIX had loadings on the quality and low-beta factors of 0.05 and 0.06 while VIGIX’s loadings were 0.16 and 0.01, respectively. This means SLGIX’s returns would have benefited from the higher loading on the low-beta factor, but would have been negatively impacted relative to VIGIX in terms of the quality premium.
- The exposure to beta for both funds was virtually identical – 1.06 for SLGIX and 1.05 for VIGIX. Thus, this had almost no impact on the return differential.
- In terms of the size premium, which was 3.7% a year, SLGIX’s exposure was 0.04 while VIGIX’s exposure was -0.02, a difference of 0.06. Thus, SLGIX’s returns benefited by about 0.22% per year from its higher loading on the size factor (0.06 x 3.7%).
- In terms of the value premium, which was 5.4%, SLGIX’s exposure was -0.26% (you would expect a negative loading on value for a growth fund). However, VIGIX’s exposure was even more negative at -0.30. Thus, SLGIX benefited from its less-negative exposure to the value factor, again about 0.22% per year (0.04 x 5.4%).
- In terms of the momentum premium, which was 8.2%, SLGIX’s exposure was 0.13 and VIGIX’s exposure was 0.02, a difference of 0.11 (you would expect growth funds to have positive exposure to momentum). Thus, SLGIX’s returns benefited by about 0.90% from its greater exposure to the momentum premium (0.11 x 8.2%).
The differences in exposure to these factors provided SLGIX with a total benefit of about 1.3%. While SLGIX did have a six-factor alpha of -1.2% (the expense ratio explains almost all the negative alpha), VIGIX’s six-factor alpha was -1.3%.
Important points to consider
Before summarizing, there are two more important points to consider. First, all of the previous data is based on pre-tax results. For investors holding these funds in taxable accounts, Wells Fargo’s active management very likely would have produced more negative tax consequences than the passively managed alternatives of either DFA or Vanguard.
Second, Morningstar data unfortunately contains survivorship bias. It’s possible that there were Wells Fargo funds which had performed poorly in the past and were either merged into better-performing funds or closed.
Summary
With an average expense ratio of more than 1%, the growth in mutual fund assets under management has likely been very good for Wells Fargo’s bottom line. In terms of whether or not their funds added value relative to comparable passively managed funds, here we have a split decision.
A portfolio of Wells Fargo’s active funds underperformed a similar DFA portfolio by 0.3 percentage points, while outperforming a Vanguard portfolio by 0.4 percentage points. In terms of the factor analysis, there was no evidence that Wells Fargo’s fund managers were able to persistently exploit market inefficiencies.
However, the Wells Fargo funds, and their investors, did benefit from higher loadings on the factors that provided premiums. And while investors benefited, that’s beta, not alpha. Of course, investors would have benefited much more if the expense ratios of the Wells Fargo funds were more like Vanguard or DFA.
The table below provides a summary of the results of the analysis performed on the four fund families covered in the New York Times article.
|
Fund Family
|
Portfolio Performance Versus DFA (%)
|
Portfolio Performance versus Vanguard (%)
|
Six-Factor Alpha (%)
|
Assets Under Management ($ billions)
|
|
Goldman Sachs
|
-2.0
|
-0.5
|
-1.4
|
$107
|
|
JPMorgan Chase
|
-0.9
|
-0.1
|
-0.8
|
$318
|
|
Morgan Stanley
|
-0.9
|
-1.2
|
-0.4
|
$34
|
|
Wells Fargo
|
-0.3
|
+0.4
|
-0.4
|
$122
|
|
Average
|
-1.0
|
-0.4
|
-0.8
|
N/A
|
The funds offered by these four large Wall Street banks, which when combined have almost $600 billion of mutual fund assets under management, add a lot of value for bank shareholders. That explains why they continue to pour money into promoting their products. Wells Fargo was the best of the four, at least in comparison to DFA and Vanguard funds. Alas, as a group they subtracted value for investors.
Larry Swedroe is director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.
Disclosure: The included data and analysis is a summary of four pieces related to an ongoing series, which totals 10 articles, evaluating actively managed mutual fund families. For a complete list of those pieces, click and search Larry Swedroe here. The corresponding portfolios are provided for informational purposes only, were constructed specifically for this review and are not portfolios that Buckingham recommends. The returns data included is from Morningstar, and Portfolio Visualizer provided the tool for the factor analysis. Performance is historical and does not guarantee future results. Information is from sources deemed reliable, but its accuracy cannot be guaranteed. It should not be assumed that any of the securities listed were or will prove to be profitable.
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