Are Active Mutual Funds Earning Their Fees?

3 Alternatives to the Fidelity Contra Fund

Introducing the Portformer Active Mutual Fund Replacement Score

For the past year we have primarily helped financial advisors identify lower-cost, higher quality ETF alternatives for their clients. While this has been great: we are saving their clients ~30bps in fee savings alone and a lot of time in the portfolio research and proposal generation. However the reality is that an ETF-only portfolio isn’t feasible for all accounts and it may not be optimal to ignore the 27,000+ mutual funds and all of the insights from the experts working at all of the active funds around the world.

We wondered, have we thrown the baby out with the bathwater in our pursuit of lower-cost passive ETFs?

As a former global macro portfolio manager, I believe there is alpha out there and I know there are managers who can find it. The question is whether the alpha survives the higher fees, higher turnover and complex portfolio construction methods that exist in these funds.

As a practical matter, many client accounts, such as certain retirement accounts, do not have ETFs on the approved universe. For this our ETF replacements were of little use for an advisor. Additionally, we work with some advisors who specialize in manager evaluation and want to show their clients that they have indeed discovered these diamonds in the rough.

Who should use our Active Mutual Fund Replacement Candidates?

  • Financial Advisors who do a lot of 401k Rollovers
  • Advisors who advise pensions, endowments and other accounts with restricted fund universes
  • High Net Worth Financial Advisors who add select active funds to provide additional alpha for their clients

How to use our Active Mutual Fund Replacements?

On our discovery page, you will see a list of the top 8 Active Funds, for most Mutual Funds AND ETFs, if you see the following list of tickers labeled “Top Mutual Fund Alternatives

  1. Click on the “Mutual Fund Alternative” Ticker
  2. View the replacement score, graph and stats below

How are these candidates generated:

We introduced these scores back in mid December during our webinar titled “Finding actively managed alternatives to ETFs that don’t statistically stink”

If you’d like to sign up for early access to our features and be alerted to our upcoming webinars. Please sign up here:

We will be publishing a whitepaper shortly for those that like to geek out on the details of the algorithm. However we show that for any current fund, we identify alternatives with a high Portformer Active Mutual Fund Replacement Score that score well across these three attributes:

  • Similar Benchmarks: The current fund and its alternative have a high degree of overlap with their Portformer Competitive Benchmarks
  • Similar Tracking Errors: The tracking errors of these funds have a robust, statistically significant correlation
  • Superior Relative Alpha: The alpha of the replacement funds is statically higher than the alpha of the current fund

As a final step, we further refine the set of alternatives to provide advisors with the top 8 alternatives so that in just 2 seconds, advisors can quickly validate the are investing in active funds that are earning their fees, and if not, we identify 8 alternatives that they should consider.

We’d love to continue the conversation with you. Please sign up for a quick 20 minute call with our team, or explore the alternative on your own with our free trial: https://app.portformer.com

Sean Kruzel

Based in Boston, Sean is a portfolio manager, MIT grad, and founder of Portformer. When he’s not investing or programming, he’s probably sharpening his skis for the next icy, New England snowstorm. Check out his full bio here: https://www.portformer.com/our-team

3 comments

  • Workflows & implementable insights — to elevate each step of the advisor/client experience

    Use our head-to-head Replacement Scores™ to quickly create client proposals, discover funds, improve model portfolios, and monitor investment plans