Easy to study MFs, hard to pin ‘em down
Defying the best efforts of a legion of statistical analysts, good mutual fund investments refuse to fit into tidy patterns. Vast quantities of information on funds are available to all.
By Agencies |
LOS ANGELES: Defying the best efforts of a legion of statistical analysts, good mutual fund investments refuse to fit into tidy patterns. Vast quantities of information on funds are available to all.
So there���s no limit to the research that can be done on this great financial success story, with worldwide assets that recently surpassed $20 trillion. If there are any secret formulas, nobody has found them yet.
Consider three separate studies that have landed on my desk in the past couple of weeks on the same subject ��� persistence of fund performance. Two conclude that under certain circumstances a fund that did well recently may be considered likely to keep producing good results.
The third study says the opposite. Two newsletters, the No-Load Fund Investor and the Independent Adviser for Vanguard Investors, claim frequent success with strategies based on picking funds off the top of a recent past-performance list.
The No-Load Fund Investor, which buys the previous year���s broadly diversified No 1 US stock fund each January and holds it for one year, says its system has produced an aggregate annual gain of 22% since 1991, compared with 14% for the average of all funds.
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The Independent Adviser for Vanguard Investors, in a roughly similar system it calls its ���hot hands strategy,��� reports a 20% yearly payoff since 1981, compared with a 13% annual gain for the Vanguard Total Stock Market Index Fund. One difference: The Independent includes diversified international funds. Both acknowledge the momentum doesn���t carry over every year.
Still, says the Independent���s editor, Daniel Wiener, within the Vanguard family (among the largest of all fund groups with $1.1trillion in assets), ���there is strong evidence that top fund performance persists.���
Not so in the broad universe of funds, says the research firm of Standard & Poor���s, which looked at them on a different time scale. Over five years through 2006, S&P found, only 13% of big-stock funds, 9.9% of mid-cap funds, and 10% of small-cap funds managed to post top-half results in all five. In the three size categories, only one-third to slightly less than one-half of the funds with top rankings in the five years through 2001 were able to do it again in the next five years.
Now, I���ve barely summarised these various studies here. It���s clear S&P has subjected funds to a sterner test than the two newsletters, which look only for performance that jumps from one single year to the next. I���ve never put much stock in mechanical systems for buying or trading funds.
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As entertaining as they may be to read about, they tend to reduce fund investing to, well, an entertainment. They also leave out the essential calculation of whether any particular fund suits a given investor���s goals. At the same time, though, these three analyses shine some light on a subject of enduring importance to fund investors ��� how much consistency of results you should hope for, or demand, from a fund.
Past performance always matters; you don���t buy a fund without looking at its record. Among other things, you want to see evidence of how the manager has fared in both good times and not so good. If you���re going to pay an active manager to pick stocks or bonds for you, you want reason to believe that manager can do better than an index fund over sustained periods of time.
That doesn���t warrant making a fetish of consistency. Since market conditions are constantly shifting, it figures that every so often even the most skilful manager is going to be zigging when the market zags. That happened in headline-making fashion in 2006, when a 15-year streak of beating the Standard & Poor���s 500 Index ended for manager Bill Miller at the $21 billion Legg Mason Value Trust.
Its 5.8% gain for the year trailed the index by almost 10 percentage points. While past performance truly is no guarantee of future results at any fund, it may serve as a valuable clue. Among those funds that do produce strong results, says Rosanne Pane, a fund strategist at S&P, ���On average top funds tend to have more experienced management and lower expenses relative to their peers. They also focus on minimising losses during down markets.���
To find such qualities at a fund I might want to buy requires me to do some digging beyond the performance statistics. Ideally, that research gives me a feel for how the fund���s management goes about its job. That extra work may bring me a powerful benefit. When unexpected ups and downs come along in the future, I���ll be well prepared to decide whether to stay aboard or bail out.
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