You can learn a lot by looking at the quarterly update of mutual funds and reading between the numbers. Knowing that the average fund investor...
You can learn a lot by looking at the quarterly update of mutual funds and reading between the numbers.
Knowing that the average fund investor isn’t a big fan of sifting through charts filled with numbers, here are some nuggets from a careful reading of quarterly results:
• Everything bad is good again.
OK, maybe not everything, but a remarkable number of funds that are the absolute worst in their categories over several long periods have been winners in the short term.
Most Read Business Stories
On Lipper’s list of leading and trailing funds by asset class, Direxion S&P 500 Bull 2.5X fund (DVSLX) was the worst large-cap core fund year-to-date and over the previous 52 weeks, but it was the top fund in its peer group over the last week and month.
It’s not surprising to see a souped-up, leveraged fund playing at the extreme ends of its asset pool, but there were plenty of other, more mainstream names that had yin-and-yang performance. Forester Value (FVALX) and its sister fund Forester Discovery (INTLX) are among other long-term laggards now on top.
Consider the top and bottom 10 funds in a peer group, and the number of such rankings grows. The trend is prevalent in fixed-income funds, too.
A fund living at the extremes of performance may give a ride that’s hard to handle. Even when the circumstances are reversed and a long-term winner is a short-range laggard, the volatility can scare any investor off, and probably should.
• Diversification works over time …
Charts of performance by investment objective show why investors want to build a portfolio of funds and spread money around. Among diversified U.S. equity-fund types, 15 of 17 categories have been negative year-to-date, but 14 categories show an annualized five-year average return higher than 9 percent. Interim figures reveal all manner of struggle, but spreading money around clearly smooths out the ride.
It’s even more obvious among world equity funds, where 24 of 26 categories have been negative in ’08, but all 26 categories averaged double-digit gains over five years.
• … But misery loves company right now.
Unless you resort to funds built to go against the trend, avoiding short-term loss without going to cash or bonds is mighty hard. Among world-equity issues, gold funds and Latin American funds were the two groups to be positive year-to-date; in diversified domestic funds, only bear-market funds and “specialty” funds were in the black for the quarter.
• It drives investors nuts.
The Ivy Cundill Global Value fund (ICDAX), in the global small-/mid-cap value category, took top honors over four weeks through five years but was worst in its group before a year ago. That happens in a new category with only 10 funds, mostly new. You can bet many fund firms will create “smidcap” value funds, hellbent on topping the charts in a small-sample world.
Chuck Jaffe is senior columnist at MarketWatch. He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.