In the last post, we reviewed the contexts of two high-performing Utilities mutual funds. While FBR’s GASFX fund provides a greater return, it does not have the same breadth of diversification as Vanguard’s VUIAX. However, for the incremental increase in technical volatility, GASFX has managed to generate far superior returns above those of the Vanguard fund, while still maintaining somewhat comparable distributions. Throughout this section, I’ll go through a couple of scenarios that would demonstrate how to evaluate both of these funds as investment opportunities.
The main practical determinant of which of these funds should be included into a portfolio (if either) is the sheer volume of capital which you have available to you for purchasing these funds. Obviously, the $100,000 minimum purchase requirement of VUIAX makes it fairly inaccessible to smaller investors looking to diversify. As a smaller investor, the GASFX fund therefore provides a better investment opportunity.
In addition to its accessibility, its respectable alpha represents a very skilled management team, while the moderate exposure to natural gas producers as well as utilities can justify its positioning in a smaller portfolio as a port of both the utilities and energy producers portions of a portfolio, allowing for more flexibility in its applications within your financial planning. Lastly, the fund is more evenly diversified throughout its entirety, whereas the VUIAX fund shows a strong preference towards its top 10 holdings.
The benefit of the even distribution of GASFX is that it is more accommodating of an unsophisticated personal investor, in the way that it more evenly diversifies risk within itself. Mathematically, both funds are more than double the statistical requirement of the required volume of holdings to qualify as diversified. The even distribution within the fund therefore has a significant impact on the ability of the fund to compensate for some of its more aggressive holdings. So why then does Vanguard offer such an inaccessible fund?
From an institutional standpoint, the VUIAX fund provides an extreme appealing opportunity to engage the Utilities sector. The breadth of the holdings provide an excellent indexing of the industry as a whole, while also providing the respectable yield that the sector is known for. Given that the fund allocates 99% of its assets into the Utilities sector, it allows the asset managers of the institution to manage their exposure to the index itself, while still providing an incremental amount of alpha through the specific selection of equities within the purchased units themselves.
The end result allows the second fund manager to build a security known as a Mutual Fund Wrap (a mutual fund composed of mutual funds). This second security allows smaller investors access to a diversified portfolio of mutual funds with similar cost efficiencies and returns of scale.
Depending on purchasing capacity, either of these funds are extremely appealing investments, given their current metrics. While we still can’t predict the future performance of these funds based entirely on these analyses, we are able to understand how the underlying concepts behind our analysis apply to a portfolio. Issues of scale, diversification, and cost impact every major investment decision we make. By considering the comparative implications of these concepts, we are able to better understand what sort of position we are entering, and most importantly, how it applies to our specific financial goals.
