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Rare mutual fund beating the index brushes off active-passive debate


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Rare mutual fund beating the index brushes off active-passive debate

Under the hood, the Monetta Core Growth Fund does not look like most mutual funds.

As investors continue to exit actively managed investments, active portfolio mangers have searched for distinct models to stay relevant in the highly competitive money management business. Some active portfolio managers have been willing to allocate a small portion of their portfolios to passive products such as exchange-traded funds.

But Illinois-based Monetta Financial Services Inc., an active registered investment advisory company with a little more than $200 million under management, has taken the adoption of passive investing to new levels. The fund's split strategy makes it a rare, and extreme, example of how active managers are warming up to passive investment products such as ETFs.

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The company's Core Growth Fund divides its $135 million in assets almost evenly between actively and passively managed securities, a distribution that both CFRA Senior Director of ETF and Mutual Fund Research Todd Rosenbluth and Morningstar Investment Management Lead Portfolio Manager Paul Arnold said they had never seen before.

"In the mutual fund world, it's not something that, at least in my experience, we see a lot of," Arnold, who heads active/passive strategies at Morningstar, said in an interview. Rosenbluth said he was "shocked" to see a mutual fund embrace ETFs so fully.

Active portfolio managers have struggled to outperform the broader market for the better part of the last two decades. Just 7.67% of active large-cap fund managers beat the S&P 500 in the 15 years leading up to 2018, according to S&P Dow Jones Indices. That trend has not changed much in 2018. Only about a quarter of large-cap mutual funds are beating the S&P 500 in 2018, CFRA's Rosenbluth said in an interview.

An active manager by trade, Monetta Financial Chairman and President Bob Bacarella created the fund, formerly the Monetta Young Investor Fund, nearly 12 years ago to try to achieve consistent annual returns through the fund's exposure to the S&P 500.

"I wanted something that would embrace performance consistency, relative to the market, and it's this combination that we came up with that seemed to work the best," Bacarella, who manages the fund along with his son, said in an interview.

At the end of June, about 51% of the fund's assets were invested passively through six broad-market and large-cap-focused index products, including BlackRock Inc.'s iShares Trust Core S&P 500 ETF, the State Street Global Advisors Inc. SPDR S&P 500 ETF Trust and the Vanguard Group Inc. Growth Index Fund.

The remaining 49% of the fund's assets were invested in approximately 30 individual stocks, including Inc., Mastercard Inc. and UnitedHealth Group Inc.

The fund has a relatively high price, however, with an expense ratio of 1.20%, Arnold said. Many of the ETFs and stocks included in the fund could be purchased through an online brokerage account and a small mutual fund for a fraction of the cost, he said.

Yet the Monetta Core Growth Fund's split strategy has paid off. Since 2006, the fund has seen total returns of 269.7%, beating the S&P 500's 163.3% return in the same period.

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The fund typically operates with a 50-50 balance between its active and passive components. But in certain circumstances, such as if the market were to drop sharply, Monetta Financial can shift the fund's passive component to as low as 30% of its assets, protecting it somewhat from a downturn in the wider S&P 500, Bacarella said. Monetta Financial has not had to reallocate the fund's weightings over the last nine years, he said, matching a period of steady market appreciation.

The ability to reallocate its assets could be especially valuable for the fund, which invests heavily in large-cap growth companies across industries such as technology, finance and retail. Many of the stocks in the Monetta Core Growth Fund's active segment are also some of the largest companies in the S&P 500, making the fund's exposure to those securities that much higher.

But that overexposure is also likely the reason why the fund has seen such high returns, Rosenbluth said.

"The fund is performing well," Rosenbluth said. "And most active funds are underperforming."

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S&P Dow Jones Indices and S&P Global Market Intelligence are owned by S&P Global Inc.