Mutual Funds -vs- ETFs

Over the past 10 years there has been a massive migration of investor money from mutual funds to ETFs.

Much of this makes sense. The vast majority of ETFs charge smaller fees than managed funds with similar investment mandates, and most fund managers can’t beat their benchmark index net of fees.

What gets forgotten in this argument is that there is still considerable value in choosing the right fund for the right climate.

For example, for the past year or so we have decided to entrust our European equity mandate to a mutual fund rather than an ETF. The decision was based on having met the fund managers and having been very impressed by their acumen and previous ability to have ridden out difficult markets. Another characteristic of the fund was the ability to take on short positions, which theoretically could offer a degree of protection in falling markets. We felt this was important given the ongoing trials and tribulations in Europe. Valuations were attractive, but uncertainty remained. Still, as long term investors it is our job to seek out opportunities that we think will pay off down the road.

European stocks have performed poorly over the past year and our allocation to European stocks has hurt overall performance. However, had we gone the route of ‘buying the index through an ETF’ the damage would have been considerably worse:

The white line in the UBS European Opportunities Fund, the orange line is the EURO STOXX 50 index:

UBS

Sometimes it can be very expensive to be cheap…