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Originally published Saturday, March 22, 2014 at 8:02 PM

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Why 2009’s ‘best picks’ haven’t turned out so good

If you had known what was coming in March 2009 and had money to put to work, the question is what funds would have looked good to you. Chances are, they would have been the wrong funds.


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Your Funds

Mutual-fund investors have come to believe that bad times bring out the best in bad funds, and that good funds roll during good times.

This is a good time to see if that’s true.

For five years, as of March 9, those good times have been rolling for the stock market, to the point where the financial crisis is now completely out of half-decade track records.

No one celebrated the start of the bull market because they had no clue the market was headed on a long jaunt that has seen the Standard & Poor’s 500 recoup its losses from the financial crisis and plenty more.

But if you had known what was coming and had money to put to work, the question is what funds would have looked good to you in March 2009.

Chances are, they would have been the wrong funds, because the year-plus leading up to that point had been bad. That means those proverbial bad funds might have caught your attention. The question is how you would feel now if they had caught your wallet.

The reason that funds which are “bad” look good during hard times centers typically on how they are built, giving the manager the flexibility to go to cash, to aggressively short the market — betting against the market or specific securities — or to get ultraconservative.

They’re generally either protecting capital at a time when the market is attacking it, or wading into the bloodbath hoping to come out the other side shiny and rich.

The problem for investors is that they generally figure that the most current success stories will have good tales to tell going forward.

If they bought what was hot during the financial crisis, the subsequent bull market most likely has hidden the mistakes they made, giving them acceptable absolute returns, but nothing spectacular compared to other options they could have picked.

But the numbers still show that mistakes were made.

Of the 30 funds that did the best in the year leading up to the start of the bull market, all but one were bear-market or trading funds, which generally means they were placing big bets against the trend. That worked while the market was in the tank, but has led to losses ever since.

But most investors who use those bearish funds don’t hold them long term, and for good reason when you consider that the market historically has trended up two-thirds of the time.

Consider that Federated Prudent Bear (BEARX) was up nearly 34 percent in the last 12 months of the bear market, according to Morningstar, that great result was near the bottom of its peer group, and in the five years since the fund has been in the top 10 percent of its peers, resulting in a five-year annualized loss of nearly 20 percent.

If you toss out the bearish funds, and had sought out safety in long-term government bonds, the top performer would have been Vanguard Extended Duration Treasury (VEDTX), which gained 20.7 percent in the last year of the bear to top its peer group, but which has earned a 3.8 percent annualized return since, dead last in the category.

Take something more mainstream still, like midcap funds.

The top midcap core fund in the last year of the bear, according to Lipper, was Hussman Strategic Growth (HSGFX), with Appleseed (APPLX) leading the midcap value funds.

Hussmann — since reclassified by Lipper — has an annualized loss of about 4 percent since, dead last in its peer group. Appleseed’s respectable 21 percent annualized gain since masks the fact that it remains near the bottom of its peer group.

And the kicker? While both funds topped their peer group during the bad times, they did not prevent losses.

By comparison, the worst global large-cap core fund during the last 52 weeks of the bear market was Putnam Global Equity (PEQUX), which has gained nearly 25 percent per year and ranked in the top quartile of its peer group in the last five years; over the last decade — thus including the worst of the bear market — the fund is only slightly below average, close behind the 10-year gains for Dreyfus Worldwide Growth (PGROX), which led the category during the end of the financial crisis.

“Chasing performance only works if you have perfect timing,” said Jeff Coons, president of Manning & Napier. “People don’t think of finding something that’s supposed to ‘save’ them when the market is correcting as being market timing, but they’re not really protecting themselves.

“Most people have horrible timing, and they would be better off just having an asset-allocation plan and finding good funds to get them through whatever happens on the market, good or bad,” he added.

“If people learned anything from the bear market and now the bull market, it should be that they need to stick to a long-term plan, and not buy or sell funds because they look good based on what the market has done in the last couple of months.”

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.

Copyright 2014, MarketWatch



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