Do Fund Redemptions Affect Performance?

by: William Darusmont
Summary

Redemptions can have a significant impact on fund/ETF performace.

A well-managed fund may be able to overcome significant redemptions.

Five things to consider when trading closed end funds or ETF's.

Recently, FinancialPlanning magazine published an article on the mutual funds and ETF’s with the biggest redemptions so far this year. There were several takeaways that should be of interest to SA readers.

According to the article, mutual funds and ETF’s collectively hold $1.2 trillion of client assets. Details of the twenty funds with the largest redemptions was provided. As I examined them there was no common link: objective,expense ratio (which includes fees), or performance. But what was unsaid is the lack of similarity since some of them had low fees and good performance, not just poor performance and high fees as you might expect.

As a former RIA, both with other firms and my own firm, I know how people object to paying 1% or more and that is one of the reasons for the rapid rise of robo-advisors. But in some of these funds clearly people were not paying attention to either fees or performance or their relationship.

Here is a table I derived from the article for analytical purposes:

FUND NAME FUND Rank YTD Return* YTD Flow** Expense Ratio NAV** % off Fund
Spyder S&P 500 SPY 1 7.50% $(16,888) 0.09% $ 277,880 5.7%
iShares MSCI EAFE ETF EFA 2 -1.01% $(8,877) 0.32% $ 72,013 11.0%
T.Rowe Price New Income PRCIX 3 -1.76% $(5,693) 0.54% $ 28,300 16.7%
iShares MSCI Em. Mkts ETF EEM 4 -4.79% $(5,402) 0.69% $ 31,714 14.6%
T.Rowe Price Growth Stk PRGFX 5 16.20% $(4,504) 0.67% $ 57,872 7.2%
iShares Russell 1000 Val ETF IWD 6 1.35% $(4,295) 0.20% $ 36,927 10.4%
iShares MSCI Eurozone ETF EZU 7 -0.98% $(4,152) 0.49% $ 10,428 28.5%
iShares iBOXX $ Inv Grade Corp ETF LQD 8 -3.43% $(3,875) 0.15% $ 34,353 10.1%
iShares IBOXX $ High Yld Corp HYG 9 0.96% $(3,314) 0.49% $ 15,365 17.7%
T.Rowe Price Equity Index 100 PREIX 10 7.45% $(2,966) 0.21% $ 27,794 9.6%
Am Funds Growth Fund of Amer A + AGTHX 11 13.61% $(2,873) 0.64% $ 198,512 1.4%
SPDR Blmbg Barclays High Yield ETF JNK 12 0.19% $(2,863) 0.40% $ 9,772 22.7%
T.Rowe Price Retirement 2020 TRRBX 13 2.48% $(2,772) 0.63% $ 21,690 11.3%
WisdomTree Japan Hedged Eq ETF DXJ 14 -4.88% $(2,765) 0.48% $ 6,051 31.4%
Am Funds Income Fund of Amer A AMECX 15 0.96% $(2,751) 0.56% $ 109,834 2.4%
Oakmark International Investor OAKIX 16 -5.99% $(2,607) 0.95% $ 45,367 5.4%
Am Funds Capital Inc Bldr A CAIBX 17 -1.27% $(2,600) 0.59% $ 106,065 2.4%
Fidelity Large Cap Stock FLCSX 18 5.50% $(2,487) 0.67% $ 2,911 46.1%
T.Rowe Price Retirement 2030 TRRCX 19 3.55% $(2,478) 0.59% $ 24,745 9.1%
Am Funds Inv Co of Amer A AIVZX 20 5.86% $(2,470) 0.58% $ 94,476 2.5%
Totals/Averages: 2.08% $(86,632) 0.50% $1,212,069 13.3%
less #6 and 12 0.65% $(4,332) $ 60,603
*thru 7/31/2018
**Millions
+ 5.75% Front End Load!!!

The lowest expense ratio was 9 basis points (0.09%) for the Spyder S&P 500 Index Fund, which at $277.9 billion is also the largest of the 20 funds, which had a combined $1.212 trillion under management. The highest were two at 95 and 96 basis points, clearly trying to stay below 1%. The average for the group was 52 basis points. Only one of these funds, the American Funds Growth Fund of America (AGTHX), had a load – the worst kind to my way of thinking on the front end and was 5.75%, distorting their expense ratio but their ytd return was 13.61%, second highest of the group! The highest was the T. Rowe Price Growth Stock Fund (TRGFX) with a 16.2% return and an expense ratio of just 0.67% (average for the group was a respectable 0.50%). Eight of the funds had negative returns ranging from -1.01% to -5.99%, while the range of the twelve winners was from the aforementioned 16.2% to 0.21%, with an average for all twenty of 2.08%. Removing the two outliers of 16.2% and 13.61%, the only two above the Spyder 7.5% return, gave an average for the group of just 0.65%.

The last category is size and that is important given the size of the redemptions, which ranged from 1.4% for the best performing AGTHX to a huge 46.1% for the Fidelity Large Cap Stock Fund (FLCSX) which closed the period with assets of just $2.911 billion. These numbers are based on redemptions vs fund size at July 31st. Thus they do not account for any gains or losses whether realized or not. They are merely relative approximations. The fact that AGTHX was the best performer despite fees is partly due to not having to raise large amounts of cash for withdrawals.

What can we learn from this exercise?

  1. Returns are not a function of size, but the ability to absorb redemptions without having to raise cash. The smaller the fund the more the manager must be responsive to redemptions and then raise more cash as a cushion against further draws.
  2. While fees are important, they are secondary to the ability of the fund managers, as evidenced by AGTHX with both high fees and solid returns; size also allowed them to be more resilient. That does not excuse the 5.75% front end load, which I would never advise paying. To my way of thinking, any load, front or back, is a penalty to the investor and encourages them to stay in the fund when the chips are down.
  3. While ETF’s provide more tax efficiency, there is no evidence that they perform better even with their typically lower fees.
  4. Before you invest, consider the size of the fund and the size of your investment. While funds of $100 billion or more are common, I feel that it is not necessary that a fund be greater than $25 billion in contrast to the average size of the funds in this group with an average $60 billion in assets.
  5. Lastly, with ETF’s or closed-end funds (CEF’s), understand how they trade and why. Is there a wide bid/ask spread? If so, try putting in an order in the middle first. Also, avoid trading in the first or last half hour of trading.

The author does not own any of these funds, nor does he plan to invest in them.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.