In mutual funds, the big get bigger
Common threads include low costs, good results

By HANK EZELL

Cox News Service

December 11, 2005

The five biggest mutual funds available to individuals contain an astonishing $323.6 billion, and the total keeps growing just about every month.

By way of comparison, the biggest U.S. lottery jackpot ever was $363 million. You would have to draw that winning ticket roughly 890 times to match the investments in the big boy funds.

On the Web: America's 10 biggest mutual funds at a glance, along with their net assets, total returns, sales charges and other useful info. Morningstar has details on thousands of funds. Click on the "Funds" tab, then use the Fund Screener tool to check factors like annual returns and risk ratings. Recent Hank columns: Prompt filers will receive tax refunds quicker than ever  A new year calls for a new financial plan  Now's the time to assess spending, saving habits  More "Bank on Hank"

To be entrusted with that much money — and hold onto it — managers of those funds must be doing something right.

In fact, there are several winning factors. Average investors can learn valuable lessons by looking them over.

"You will see below-average expenses, high-quality management, diversified portfolios, and, of course, a long and generally successful track record," said Russel Kinnel, director of mutual fund research for Morningstar.

It would seem that high investment returns are the most important factor. But it's not that simple.

The biggest mutual fund of all is the Vanguard 500 Index fund, and its main selling point is low expenses. The fund managed investments totaling $70.9 billion at the end of October, according to fund tracker Morningstar.

The fund has no upfront sales fee and it takes only 0.22 percent a year from its investments — your money — to pay management expenses. The average for all domestic stock funds is 1.44 percent.

Another selling point is that it's an index fund, meaning that it is built to match the performance of the Standard & Poor's 500 index. It rarely buys and sells stocks, which keeps down expenses and avoids generating taxable income from trading.

It won't give you anything to brag about, because its performance is, by definition, average.

Yet another positive is that it's the brainchild of John Bogle, a champion of index investing, a gadfly to the rest of the mutual fund industry and, many investors believe, a one-man standard of excellence.

The second-biggest mutual fund is the Growth Fund of America, with $68.6 billion in assets in its Class A shares. The fund meets Kinnel's criteria, but only with a footnote about investment costs. Its annual expenses are on the low side, at 0.68 percent a year, and the company now waives a portion of that charge.

But you have to pay a 5.75 percent sales charge to buy A shares.

Other classes of shares cost less at the time of purchase but have higher costs later on.

These arrangements are fairly typical for fund groups that want to encourage stockbrokers and other financial advisers to sell their shares. Much of the extra costs go to paying commissions for the sales they make.

American Funds manages the Growth Fund, along with the third- and fourth-largest funds, Investment Company of America A shares ($66.3 billion) and Washington Mutual Investors Fund A shares ($62.8 billion).

Each extracts 5.75 percent of your investment as a sales charge, with other arrangements for other share classes.

"Obviously if you are a self-directed investor who doesn't need advice, it probably is not worth paying that load," Kinnel said. If you want professional investment advice, a sales charge is one way of paying for it.

On the other hand, Kinnel noted, each of the American Funds entries has a history of relatively high investment returns. Advisers expect, and investors hope, that those higher returns will eventually overcome the higher sales charges.

The fifth fund on the list, Fidelity's Contrafund, illustrates the principle that past performance should be evaluated on a long-term basis. Contrafund, as the chart shows, gained an average of 11.8 percent annually over the last 10 years.

If you took a short-term view, you would find that Contrafund had a total return of 19.1 percent over the last year. That's a stunning figure, but it would be a mistake to count on it for next year or the one after that.

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