Investors should think twice before picking an actively managed mutual fund according to its style category. By “style category,” I’m referring to the widely used method of grouping mutual funds according to the market-cap of the stocks they invest in and where those stocks stand on the spectrum of growth-to-value.
In urging you to think twice before picking a fund based on this matrix, I’m not questioning the existence of important distinctions between the various styles. Fama and French’s research convincingly showed that there are systematic differences between them. My point is that there also are huge differences within each style as well.
To illustrate, consider the midcap-growth style. As judged by the Vanguard Mid-Cap Growth ETF VOT, this style produced a 28.8% loss in 2022. Yet, according to Morningstar Direct, the best-performing actively managed midcap-growth fund last year produced a gain of 39.5%, while the worst performer lost 67.0%.
“ The only way to eliminate idiosyncratic risk when investing in particular styles is to invest in an index fund.”