A Funny Thing Happened on the Way to Great Fund Performance

Investors look at superior long-term fund performance with a certain degree of envy and regret.  If only they or their advisor had the foresight to add those top producing funds to the portfolio before they made their run.

 Well, what if they had added them to their portfolio?  Would they have kept them long enough to realize the gain?  In many cases, the answer would have been “No!”

 I took a look at 454 equity funds in 31 investment categories for the 10-year period 1998-2007.  These funds finished the period as the enviable top quartile funds of their respective categories.  I wanted to see how smooth the ride was in garnering such envious performance.  For most of them, the ride wasn’t smooth at all!

 For the period, these top performers spent 35% of the years producing bottom half category results, and 17% of the time their performance was at the very bottom of the category.  Many top performers spent as much as 60% of the period generating bottom half results, including Old Mutual Large Cap (OLLLX) and Advisors Inner Circle FMC Select.  Both of these top quartile funds generated bottom quartile returns in six years of the 10-year period.

On the way to some envious returns, owners of these funds would have had to stay the course in the face of some pretty rough sailing.  Did they?  

 The value of an advisor only begins with the fund selection process.

 The complete report is available at www.JeffMcTague.com 

Actively managed funds have gotten a bad name over the years by proponents of no-load index funds, especially Vanguard’s John Bogle and writer Jonathan Clements.  They claim that actively managed funds seldom outperform the market as defined by the S&P 500 Composite.  Well, it is true — sometimes!  First, let me define those actively managed funds that investors should expect to outperform the S&P 500.  You see, not all stock funds are meant to beat the S&P 500.  Only those mutual funds that invest in S&P 500 member companies should participate in a comparison to the S&P 500, and then only those funds taking at least as much risk as the S&P 500 — those with a beta of 1.00 or greater.  As recently as 1998, the success rate of actively managed funds outperforming the S&P 500 Composite was not very good. 

But things have changed for the better for actively managed funds, starting in 1999.

While investors and their advisors who seek S&P beating performance must still be discretionary shoppers, the odds of finding such rewarding funds are much better than these gentlemen and their ilk would lead you to believe.