Joe Bristol, of New Orleans, had “about had it” with First Eagle Gold fund, thanks to year-to-date losses of nearly 40 percent when all of his domestic stock funds have gained.
“This is about the last straw,” he wrote in a recent email. “I’ve had this fund for about 10 years now, and the last five it seems to have gone from bad to worse. My financial planner tells me it’s OK, but this fund is a loser lately. Is there any reason for me to stick with it?”
The answer to that question — in fact, the answer to why an investor would stick with any fund in which performance has been disappointing — depends not on the market, but on why the investor bought the fund in the first place.
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While Bristol was looking for an answer that talked about whether precious metals still have a role in diversifying a portfolio, the real answer that investors should be looking for when making decisions about a fund comes to the question, “Would I buy this fund again today?”
It’s a simple question that most investors are poorly equipped to answer, typically leaving them just like Bristol, upset by a stretch of poor performance and ready to leave a fund without bothering to reconsider their motivations.
It’s why investors who say they buy funds to get qualities like diversification and portfolio balance dump those funds based strictly on recent results.
In answering whether you would buy a fund again today, it helps to know why you bought it in the first place.
Most shareholders (Bristol included) start at a disadvantage, because they don’t write down their thinking at the time of purchase. (In Bristol’s defense, the financial adviser should have given him notes on why the fund was good for the portfolio.)
Bristol, for example, knew he wanted diversification when he bought First Eagle Gold (SGGDX) a decade ago, but could not recall if the fund got high marks from research firms like Morningstar or Lipper, could not remember exactly the returns his adviser suggested he would get from the fund, and more.
Every component that factors into a purchase decision should be included on the sheet saying why the fund was purchased in the first place.
That way, when a manager leaves, a rating is altered, or the investor has life changes — perhaps amassing enough money so that finding a fund with a low investment minimum is no big deal — it can be factored in the future into whether the investor would buy the fund again.
Ultimately, Bristol recalled that he bought the fund hoping to have an asset that did not move in sync with the stock market.
He knows the fund was highly rated — he said he never buys funds that don’t get high marks — and his personal expectation for any equity fund is for a return of at least 6 percent a year over time.
By those measures — without denying that the year-to-date decline is scary — it looks like Bristol is frustrated with a fund that has given him exactly what he wanted.
The fund gets five stars from Morningstar and gets Lipper’s highest mark for total return; $10,000 invested in 2003 is worth more than $21,000 today.
At his target return of 6 percent, the fund would have doubled his money in 12 years; in short, despite recent woes the fund is beating his expectations.
That doesn’t excuse the woes, however, but even in the five-year annualized loss of 1.3 percent, the fund has done better than its peers and ranks near the top of Lipper’s precious-metals group.
The fund gets Lipper’s worst mark for “preservation of capital” and ranks in the middle of the pack for “consistent return,” but Bristol said that only the low preservation score makes him nervous. He could not say that it would have stopped him from buying the fund a decade ago.
Thus, Bristol came to the conclusion that if he wanted to buy a gold fund today, the First Eagle fund that he expected to dump would actually be one that makes the cut.
Of course, he might not want to buy a gold fund today, but that’s a different conversation.
For someone looking to time the market, precious metals are a tough buy or hold right now because they have a tendency not to pay off for people who “buy the dips” — downturns tend to be prolonged — even as they work out as a diversifier over time.
Having made an asset-allocation choice when he bought the fund, however, Bristol reluctantly concluded that he would, indeed, buy the fund again today.
“Turns out,” he said at the end of our email exchange, “that the more I look past performance, the more the fund has given me what I expected; I just forgot what that was while the gold market was going so deep in the tank.”
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.
Copyright 2013, MarketWatch