Illustration: Daniel Hertzberg for Barron’s
Just about everyone seemed to be a winner in 2017. Although the year started with an air of skepticism about whether the rally was only temporary, “global synchronous growth” became the battle hymn of the markets as the months ticked by. “In terms of the [market] environment and economy, it was probably as good as it’s been since I got in the business in the mid-1990s,” says Rob Sharps, group chief investment officer and head of investments at T. Rowe Price
That observation was echoed by many of his counterparts at firms included in Barron’s annual Best Fund Families rankings. For the second year in a row, Natixis Investment Managers topped the list for 2017 performance. While Natixis isn’t a household name for U.S. investors, some of its affiliates—including Oakmark Funds and Loomis Sayles—need no introduction. Natixis is joined at the top by some of the industry’s heaviest hitters: Vanguard Group in second place, followed by T. Rowe Price, TIAA Investments, and Fidelity Investments.
Before going any further, we have news of our own: This year, Barron’s made the most significant change to our methodology since we started the rankings more than two decades ago. To preserve the original intent—to compare fund family performance across many different categories—we no longer include traditional, capitalization-weighted index funds. The results reflect firms’ abilities to make active investment decisions, be it via individual stock-picking, asset allocation, or crafting more sophisticated indexes, such as with smart beta or factor products.
This is by no means a call on active versus passive—we believe both play a role—but it is a reflection of how the industry has changed. When Barron’s debuted our first ranking in 1996, exchange-traded funds were in their infancy, and for most people index investing meant owning a Standard & Poor’s 500 index fund. By far the largest of its kind back then, the Vanguard 500 Index (ticker: VFINX) had $26 billion in assets; today, it has more than $400 billion. The largest and oldest exchange-traded fund, the SPDR S&P 500 (SPY), has another $266 billion.
From the beginning, Barron’s editors made the call to exclude S&P 500 index funds. Yet, as the years went by and new variations of indexing came to the fore, the exclusion of one group of index funds seemed arbitrary. After weighing different options with Lipper, we made the call to eliminate all passive funds, with one exception. Index funds—whether they measure the broad market or a segment of it—are virtually indistinct, apart from price. “Smart beta” ETFs, however, take a different approach, and are more similar to active management. These funds don’t simply index a slice of the market—the energy sector or small stocks, for example—they own stocks based on a variety of factors. They are passively managed in the sense that they only change their holdings on a predetermined schedule, but they are active in their construction and divergence from the market, so we included them in the ranking.
Click to view a PDF of the Best Fund Families of 2017
Some may take issue with this change in methodology. “Stripping [passive] out, I think, doesn’t tell the same story,” says Vanguard Chief Investment Officer Greg Davis, who notes that investors should consider how active stacks up against passive when making decisions. We agree—when choosing a particular fund, investors should always compare its performance to the relevant benchmarks. But to understand which firms are delivering strong relative performance across a broad selection of actively managed funds, there is value in gauging how active managers perform, relative to other active managers.
Barron’s made another tweak: We are including sector and country-specific funds in the overall performance tally, although a firm isn’t required to have either to be included in our survey.
To be eligible for ranking, firms must offer a certain number of funds in specific categories, all with a minimum track record of one year: This includes at least three actively managed funds or smart-beta ETFs in Lipper’s general U.S. stock category, one in world equity, and one in mixed-asset, plus two taxable bond funds and one national municipal bond fund. Rankings are asset-weighted and based on relative performance for funds in those broad categories. (For a more detailed explanation of the methodology see bottom of story.) Unlike most fund stories in Barron’s, this ranking focuses on one-year returns for a snapshot of performance, though we also provide rankings for five- and 10-year results.
Our new methodology eliminated just two firms: AssetMark came up short on the number of general equity funds needed, and Brown Advisory Funds fell out because it didn’t meet the mixed-asset requirement.
All told, just 59 asset managers out of the 848 in Lipper’s database had the diversified menu of equity and fixed-income funds to meet the criteria for this ranking. (Two years ago, that number was 67; last year, 61 firms were eligible for the ranking.) Thus, as in the past, several notable fund shops, including $327 billion Dodge & Cox and $370 billion Janus Henderson (JHG), aren’t on our list.
There are two newcomers: $395 billion Aberdeen Asset Management (in 45th place) and $880 million Saratoga Capital Management (40th). “Saratoga is a reference to a key battle in the American Revolution,” says Bruce Ventimiglia, who founded the Arizona-based firm in 1994 with the then-novel idea of giving individual investors access to institutional money managers. Its flagship fund, the $550 million James Alpha Global Real Estate Investments Portfolio (JAREX), outperformed 94% of its Lipper peers. Saratoga is the smallest firm in the ranking, by far.
The focus on active didn’t keep passive pioneer Vanguard off the leader board; the firm also has a strong lineup of actively managed funds. But the new focus on active management probably did affect the placement of other firms with many assets in index funds and a less robust actively run lineup.
We suspect this was the case for State Street (STT), the firm behind SPDR ETFs. It manages $2.8 trillion in assets, about $644 billion of which is in its ETFs. The firm slipped from third place in 2016 to 54th this year. BlackRock (BLK), the owner of iShares, ranked 30th; Invesco (IVZ), the owner of PowerShares, at 53rd, and First Trust Advisors, at 24th, were also probably affected by the change. Active ETFs and smart beta funds and ETFs are still included.No. 1: Natixis
Because results are asset-weighted, it helps when some of your largest funds are also your top performers. This was certainly the case for Natixis Investment Managers, the asset-management division of Paris-based Natixis (KN.France). Four of its five largest funds available to U.S. investors ranked in or near the top decile of their peer groups.
With more than 26 affiliated asset managers running nearly $1 trillion globally, Natixis aims to offer investors the best of both worlds—the distribution and operational efficiencies of a large organization, with the high-conviction investment expertise of specialized managers.
Investors at the French company’s Oakmark Funds were rewarded in 2017 by the Chicago-based firm’s disciplined value philosophy. Once again, $47 billon Oakmark International (OAKIX) led the charge, ending 2017 up 30%, better than 98% of its Lipper peers, after adjusting for marketing and distribution fees, known as 12b-1s. (See the nearby methodology for an explanation of why we rank this way.) The $20 billion Oakmark fund (OAKMX), up 21% last year, also contributed heavily to Natixis’ overall placement.
Oakmark’s secret is simple to describe but tough to execute: buy high-quality companies when they are selling at a discount and then “very patiently wait for the market to change its perception,” says Oakmark manager Bill Nygren.
The fund and many of its sibling portfolios took a substantial position in financials, including Bank of America (BAC) and Citigroup(C) when they were market pariahs. By late last year, the Oakmark fund had more than 30% of its assets in the financial sector, which returned 22% in 2017. The fund made an early call on Caterpillar (CAT). Ditto for Diageo (DEO) and Nestlé (NSRGY). Although Google parent Alphabet (GOOGL) doesn’t scream value at 27 times 2018 earnings, the company’s investments in artificial intelligence and YouTube more than justify that valuation, says Nygren: “We think you could be getting more than half the stock price in those other assets that aren’t contributing anything to earnings” yet.
Meanwhile, the $8.5 billion Gateway fund (GATEX), which uses options collars, bested 98% of its Lipper peers with a 9.9% return. Another powerhouse in the Natixis family is Loomis Sayles, whose $12.8 billion Loomis Sayles Bond fund (LSBRX), co-managed by fixed-income doyen Dan Fuss, returned 7.4% last year.
“What I am most proud of is that there was strength across the vast number of our affiliates, as well as all the different categories,” says Natixis’ David Giunta, who took over as president and chief executive for its U.S. and Canadian operations last February. “On the equity side, we have high-conviction active managers willing to place bets based upon the research they’ve done, and on the fixed-income side, our managers did a very good job getting the most that they could out of a tough market.”No. 2: Vanguard
Vanguard is a pioneer of passive investing, and $3.9 trillion of its $5.1 trillion in assets are invested in that fashion. Yet the Valley Forge, Pa.–based firm is no slouch when it comes to active management, as its second-place standing attests. (Vanguard has a history of strong showings: It was 14th in 2016, and No. 1 in 2014.) The $870 billion in the firm’s actively managed stock and bond funds (the rest is in money-market funds) is more than 55 of the 59 fund firms on this list oversee. Vanguard manages most of the firm’s $415 billion in active bond funds in-house, though it chooses outside managers for nearly all of its $455 billion in active equity funds. All in all, it has 28 subadvisors; its most tenured is Wellington Management. A recent addition is Legg Mason’s (LM) ClearBridge Investments.
The $65 billion Vanguard Primecap (VPMAX), which returned 30% last year, speaks to the power of this model. The contrarian growth managers are the epitome of long-term investors: Many of their top holdings—including Adobe Systems (ADBE) and Texas Instruments (TXN), both strong performers in 2017—have been in the fund since the early 1990s.
In addition, the $37 billion Vanguard International Growth fund (VWILX) posted a 43% gain last year. Under the helm of subadvisors Baillie Gifford Overseas and Schroder Investment Management, it bested its benchmark—the MSCI ACWI Ex USA—by 16 percentage points, thanks to positions in Alibaba Group Holding (BABA), and Baidu (BIDU), among others. This was a case where active management certainty seemed to pay, at least in 2017.
Vanguard being Vanguard, CIO Davis emphasizes the importance of low-cost investing, even when paying a little extra for active management. Vanguard’s active stock funds have a weighted expense ratio of 0.27%, and its active bond funds are a scant 0.12%. “Whether it’s an up market or a down market, we’re going to benefit from having that tailwind, relative to everybody else,” Davis observes.No. 3: T. Rowe Price
Over time, fees surely add up, but in a singular year like 2017, outperformance isn’t measured in basis points. T. Rowe Price (TROW) CEO Bill Stromberg credits a deep bench of equity and credit analysts for the firm’s spot on the leader board. “We spent the better part of the last 17 years building a global investment platform that shares best ideas and really takes advantage of sector expertise across the world,” Stromberg says. “A year like last year, with markets advancing globally, really played to our strengths.”
Unapologetically active, the Baltimore-based firm has less than 5% of its $1.1 trillion in a handful of passive index funds and has yet to launch any ETFs, although it has filed for regulatory approval to launch active ones.
The market’s turn to value stocks in 2016 weighed on the family’s overall standing that year, when it finished in the middle of the pack. As growth came back in 2017, however, so did T. Rowe’s large-cap growth lineup. The $54 billion T. Rowe Price Growth Stock fund (PRGFX) ended the year up 34%, adjusted for 12b-1 fees, while the $52 billion T. Rowe Price Blue Chip Growth (TRBCX) soared more than 36%.
Yes, these and other funds rode the coattails of FANG stocks, says Sharps, but Facebook (FB) Amazon.com (AMZN), Netflix (NFLX), and Google parent Alphabet weren’t the only success stories by any stretch. Some the biggest contributors last year included Boeing (BA), Vertex Pharmaceuticals (VRTX), and old-school tech titans such as Microsoft (MSFT). “We’ve been ahead of the shift to things like e-commerce and cloud computing,” says Sharps, who was the longtime manager of another top performer, the $17.7 billion T. Rowe Institutional Large Cap fund (TRLGX), until recently transitioning into his role as head of investment.
As was the case among other leaders, T. Rowe Price owes some credit for its showing to its target-date funds, which fall under mixed assets and represent more than a fifth of the firm’s assets under management. Among its best relative performers, the $25 billion T. Rowe Price Retirement 2030 fund (TRRCX) returned more than 19% in 2017, thanks in part to what Sharps calls “alpha-rich diversifiers,” spanning small-cap stocks, high-yield bonds, and emerging markets.No. 4: TIAA Investments
The name TIAA is associated with its roots in managing retirement funds for educators, but the parent of this year’s fourth-ranked fund family has been quietly building on its expertise elsewhere in order to offer investors the holy grail of strong risk-adjusted returns. All told, its asset-management division now has more than 20% of its collective $970 billion in assets in alternative investments—ranging from agriculture and real estate to timberland—and it was a pioneer in including such holdings in its target-date retirement funds. “Very few firms that are in the long-only space have successfully pivoted that dramatically into alternatives,” says Vijay Advani, chief executive officer of Nuveen, a TIAA company.
Alternatives are just part of the story of TIAA’s transformation, as it looks to expand its reach while simultaneously consolidating its operations. In 2017, the firm rebranded its asset-management arm under the Nuveen name. Nuveen, acquired in 2014, is now the parent of the TIAA Investments unit (the TIAA-CREF funds themselves haven’t undergone a name change) and Nuveen Fund Advisors, which ranked 15th this year.
Meanwhile, TIAA continues with its strategy of giving its 13 company-owned affiliate managers autonomy over portfolio decisions—but with centralized distribution, marketing, and back-office support.
While plenty is new at TIAA, the century-old firm has no plans to rewrite its investing DNA, says CEO Roger Ferguson: “Because of our history investing people’s retirement money, we have a strong focus on generating long-term value and looking for sustainable investment opportunities, not following the latest fad,” he says. “I think that helped us, as well, during the course of the year.”
Stellar relative performance for the firm’s life-cycle funds contributed largely to its high ranking in 2017, but there were other standouts, including: the $7 billion TIAA-CREF Growth & Income fund (TIIRX), whose manager Susan Kempler delivered a nearly 24% return last year, and the $4.7 billion TIAA-CREF Bond fund (TIORX), which beat more than 80% of its peers.No. 5: Fidelity
To be sure, the $130 billion Fidelity Contrafund (FCNTX), up 32%, made no small contribution to Fidelity’s fifth-place finish for 2017. Nevertheless, the Boston-based fund family owes its ranking to the strong relative performance posted by dozens of funds. More than a third of its funds, across individual share classes, finished 2017 in the top quartile of their peer groups. By Fidelity’s count, its active equity funds outpaced their benchmarks by more than four percentage points last year, based on a weighted average.
“It was probably as good a backdrop as you could hope for, not just the equity market, but across the board,” says Charlie Morrison, Fidelity’s president of asset management. “I can’t remember a time where collectively we’ve had as strong performance as we did in 2017.”
Morrison credits this outperformance to individual company bets, both for equities and for fixed income. While Fidelity’s stock funds own many of the usual suspects, from Amazon.com to Tencent Holdings (700.Hong Kong), it first took note of these companies early in their evolution. That was the case for computer-graphics processor maker Nvidia (NVDA), which appreciated 81% in 2017 after more than tripling in 2016. Fidelity has owned the stock since its 1999 initial public offering of $12 a share, as its capabilities have moved beyond videogames to such areas as augmented reality and artificial intelligence.
No stranger to innovation itself, Fidelity recently was testing 170 funds in a pilot program, to the tune of $500 million of the firm’s money. This broad focus, says Morrison, is one reason that it has more than 800 mutual funds in this ranking alone, after accounting for multiple share classes. “My preference would be to have a smaller number, to be honest with you, and we’ll continue to work at that,” he says. “But at the end of the day, they exist because we’re trying to solve the needs of many people.”
As for the bottom of the list?
Many of the laggards have consistently ranked low on our Best Fund Families survey. This isn’t to say that they don’t have some standout strategies, only that as a firm they don’t outperform consistently. The list can also fluctuate from year to year, as different styles go in and out of favor.
Illustration: Daniel Hertzberg for Barron'sHow We Rank the Fund Families
All mutual and exchange-traded funds are required to report their returns (to regulators, as well as in advertising and marketing material) after fees are deducted, to better reflect what investors would actually receive. But our aim is to measure managers’ skill, independent of expenses beyond annual management fees. That’s a large part of why we calculate returns before any 12b-1 fees are deducted. Similarly, loads, or sales charges, aren’t included in our calculation of returns. The other reason? The multitude of share classes makes it nearly impossible to ascertain what the typical investor would pay in terms of annual expenses or loads.
Each fund’s performance is measured against all of the other funds in its Lipper category, with a percentile ranking of 100 being the highest and one the lowest. This result is then weighted by asset size, relative to the fund family’s other assets in its general classification. If a family’s biggest funds do well, that boosts its overall showing; poor performance in its biggest funds hurts a firm’s ranking.
To be included in our survey, a firm must have at least three funds in the general equity category, one world equity, one mixed asset (such as a balanced or target-date fund), two taxable bonds, and one national tax-exempt bond fund.
We have historically excluded single-sector and single-country stock funds, but those are now included, as part of the general equity category. We exclude all index funds, including pure index, enhanced index, and index-based. But we include actively managed exchange-traded funds and ETFs with indexing strategies that are not the traditional capitalization-weighted or equal-weighted.
Finally, the score is multiplied by the weighting of its general classification, as determined by the entire Lipper universe of funds. The category weightings for the one-year results in 2017 were general equity, 36.1%; mixed asset, 19.9%; world equity, 18.7%; taxable bond, 21.2%; and tax-exempt bond, 4%.
The category weightings for the five-year results were general equity, 36.6%; world equity, 18.8%; mixed asset, 19.2%; taxable bond, 21.2%; and tax-exempt bond, 4.2%. For the 10-year list, they were general equity, 38.1%; world equity, 17.6%; mixed asset, 19.8%; taxable bond, 19.9%; and tax-exempt bond, 4.6%.
The scoring: Say a fund in the general U.S. equity category has $500 million in assets, accounting for half of a firm’s assets in that category, and its performance lands it in the 75th percentile for the category. The first calculation would be 75 times 0.5, which comes to 37.5. That score is then multiplied by 36.1%, general equity’s overall weighting in Lipper’s universe. So it would be 37.5 times 0.361, which equals 13.54. Similar calculations are done for each fund in our study. Then the numbers are added for each category and overall. The shop with the highest total score wins. The same process is repeated to determine five- and 10-year rankings.
CORRECTION: A previous version of the tables on which this story is based incorrectly left out Guggenheim Investments. The tables and article have been updated to reflect Guggenheim’s position as No. 49 in the one-year ranking, 35 for the five-year, and 49 for the 10-year.