January 25, 2008
"Past performance is no guarantee of future performance" (again)
Last month's Wall Street Journal reported "Winning Funds Share Traits, But the Trick Is Finding Them". The article looked for funds that had beaten the S&P 500 for each of the prior 8 years ( 1999 through 2006 inclusive) and found 30 such funds. It then sought common characteristics among these funds in the hope that such characteristics would help investors identify other funds that would perform similarly well in the future.

The article's methodology doesn't strike me as a credible guide for separating likely future winner funds from likely future loser funds. It seems to conclude from the fact that the winningest funds happen to share characteristic X that funds with characteristic X are likely to outperform funds that don't have characteristic X. But that's a logical fallacy. For example, the article observes that:

Many of the top funds have teams of managers instead of individuals, which allows for specialization by the stock pickers.
The WSJ could have (but didn't) research and report whether team-managed funds as a whole tend to outperform funds with individual managers. We don't have enough data to answer that question conclusively, but according to our CRSP Mutual Fund database about 2/3 of all stock funds are team-managed. And in 2007, 58% of indivdual manager stock funds beat the S&P 500, but only 49% of team-managed stock funds beat the index.

The article also reports that funds with "low expenses" and a "buy-and-hold approach" make good investments. That has certainly been shown empirically here and elsewhere, but few of the funds on the WSJ's list reasonably meet those criteria -- only 7 of the 30 funds have expense ratios below 1% and turnover below 50%. (And even 50% turnover -- selling the average stock after only 2 years -- is a generous definition of "buy and hold")

But the best advice in the article is in the first paragraph:

Don't chase past returns
Of the 30 past winners, only 13 beat the index again in 2007
Ticker Fund Name
Return
CSSPX Cohen & Steers Global Realty Fund, Inc; Class I Shares
-18.58
SCMVX RBB Fund, Inc: Schneider Small Cap Value Fund
-17.08
UBVLX Undiscovered Managers Funds: Undiscovered Managers Behavioral Value Fund; Institutional Class Shares
-8.64
DFSCX DFA Investment Dimensions Group Inc: US Micro Cap Portfolio
-5.22
SMCDX Wells Fargo Funds Trust: Wells Fargo Advantage Mid Cap Discipline Fund; Investor Class Shares
-4.89
DFSTX DFA Investment Dimensions Group Inc: US Small Cap Portfolio
-3.06
RPFEX Davis Series, Inc: Davis Opportunity Fund; Class B Shares
-2.15
CAMOX Advisors' Inner Circle Fund: Cambiar Opportunity Fund; Investor Class Shares
-1.86
FSLBX Fidelity Select Portfolios: Brokerage & Investment Management Portfolio
-.15
MPSCX Morgan Stanley Institutional Fund Trust: US Small Cap Value Portfolio; Institutional Class Shares
.13
RGFAX Royce Fund: Royce Heritage Fund; Service Class Shares
1.20
WMICX Wasatch Funds, Inc: Wasatch Micro Cap Fund
2.23
RYLPX Royce Fund: Royce Low-Priced Stock Fund; Service Class Shares
2.32
VMCVX VALIC II Mid Cap Value
2.80
RSVAX RS Investment Trust: RS Value Fund; Class A Shares
3.76
GGSAX Goldman Sachs Trust: Goldman Sachs Growth Strategy Portfolio; Class A Shares
4.58
REBSX Russell Investment Company: Equity II Fund; Class I Shares
4.77
  S&P 500 Daily Reinvested Index
5.49
EXHAX Manning & Napier Fund, Inc: Pro-Blend Maximum Term Series; Class A Shares
6.00
PHGAX Target Asset Allocation Funds: Target Growth Allocation Fund; Class A Shares
6.22
PRSGX T Rowe Price Spectrum Fund, Inc: Spectrum Growth Fund
8.65
ACTWX Columbia Acorn Trust: Columbia Acorn Select Fund; Class Z Shares
9.20
ACDAX AIM Equity Funds: AIM Capital Development Fund; Class A Shares
10.69
PGSGX JPMorgan Trust II: JPMorgan Small Cap Growth Fund; Class A Shares
12.34
ANCFX Fundamental Investors, Inc; Class A Shares
13.55
HIACX Hartfd:Cap App HLS;IA
17.40
PRNEX T Rowe Price New Era Fund, Inc
40.69
IGNAX Ivy Funds: Ivy Global Natural Resources Fund; Class A Shares
43.59
FAGNX Fidelity Advisor Series VII: Fidelity Advisor Energy Fund; Class T Shares
44.84
PRGNX Jennison Natural Resources Fund, Inc; Class B Shares
45.03
FNARX Fidelity Select Portfolios: Natural Resources Portfolio
50.08
Save that thought until next January when he find out how many of these funds beat the S&P again in 2008. Posted at January 25, 2008 09:38 PM | Permalink



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