Did Barron’s Number-One Ranked Fund Family Add Value for Its Investors?

Our series evaluating the performance of the market’s most prominent actively managed mutual fund firms continues today with an in-depth look at Waddell & Reed Investment Management, which in February earned a number-one spot on Barron’s list1 of best fund families for the prior 10-year period.

In its annual ranking, Barron’s named Waddell & Reed the top-performing mutual fund family (out of 48) for the preceding 10-year period. In the latest five-year period, the firm ranked second (out of 56 fund families). Waddell & Reed, however, dropped all the way to 50th place (out of 65 fund families) in the one-year rankings based on the firm’s performance in 2014.

In response to his firm’s rank on the list, Waddell & Reed’s chairman and CEO, Henry Herrmann, stated: “Over longer periods, and across differing market cycles, our rigorous investment process has led to solid results for investors. We prefer to judge performance across several years, as the majority of our investors have long-term goals and aspirations. We’re pleased to see that these rankings have continued to validate our process.”

By examining Waddell & Reed next, I am injecting a large degree of hindsight bias into the picture. There is no way to have known 10 years ago that Waddell & Reed would earn a number-one ranking.

After all, if any actively managed fund family were able to deliver superior results, surely it would be the one chosen by Barron’s as its top performer during the last decade. Thus, we clearly should expect to see Waddell & Reed’s funds outperform relative to passively managed alternatives.

As is my practice, I’ll begin my analysis by comparing the performance of Waddell & Reed’s actively managed domestic equity funds to similar offerings from two prominent providers of passively managed funds, Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)

Morningstar reported that as of the end of May 2015, Waddell & Reed had almost $29 billion in assets under management.

While I usually employ 15-year periods in performing this analysis, in this case I’ve chosen to limit the period to 10 years because there were only five Waddell & Reed funds in two asset classes with a 15-year track record. Limiting my analysis to just five funds would reduce the comparison’s value. Even limiting my period to 10 years leaves me with just seven funds covering four domestic asset classes. The period I examine runs from June 2005 through May 2015, differing slightly from the 10-year period covered by Barron’s. In cases where Waddell & Reed has more than one fund in an asset class, I’ll use the average return of their funds in the comparison.

I’ll use the lowest-cost shares when more than one class of fund is available for the full period. This is particularly important to note in this instance because Morningstar reports that almost 97% of Waddell & Reed’s assets under management are in funds that have loads (and thus carry higher expenses).

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