Objective information about retirement, financial planning and investments


Mutual Funds – The First Shall be Last and So On


Well another year is in the books and there is no shortage of articles about what worked well and what didn’t in terms of investing.  For those of us who use and follow mutual funds it’s always instructive and interesting to take a look back as we move forward.  Here are some observations and examples from 2012 and some lessons that we can take into the future.

Artisan Mid Cap Value ARTQX 

The managers of this fund were named as Morningstar’s Domestic Manager of the Year for 2011.  So how’d they do in 2012?  The fund gained a respectable 11.39% for the year, but that only ranked the fund in the 86th percentile (bottom 14%) of its category.  Did the award go to their heads?  I doubt it.  I’ve written about this closed fund here before and it is one of my favorite mutual funds.  This fund is included in the menu of several 401(k) plans for whom I provide advice as well as in the portfolios of many of my individual clients.  The fund’s track record since its inception has been exemplary and in fact the fund ranks in the top 1% of all funds in its category for the ten years ending 12/31/12.  Artisan is a solid fund company who regularly closes funds that have become too large, including this fund.  While we can’t predict the future, the fund’s relatively poor 2012 performance is a non-issue in my mind at this point.

American Funds Growth AGTHX

My October post on this multi-share class fund asked if it was a fallen star.  Using data from the A shares, the fund had a banner 2012 returning 20.54% and placing in the 7th percentile of its category.  This comes after finishing in the 64th percentile or below in three of the five prior calendar years.   This still leaves the fund in the 53rd percentile of its category for the five years ended 12/31/12; though the fund is in the 22nd percentile for the trailing ten years.  As I discussed in the post, the fund was a top performer year in and year out until 2007.  As one industry publication pointed out, the fund has become somewhat of a “closet indexer” with its increasing correlation to the S&P 500 Index.  In fact the Vanguard Large Growth Index Fund is a far less expensive alternative that has outperformed Growth Fund by almost 300 basis points annually for the past three years and has gained almost three times as much annually for the past five years ending 12/31/12.  While I have tremendous respect for the American Funds as a group, this fund’s 2012 performance does nothing to change my view of the fund as an investment vehicle for my clients.

On a more macro level, 2012 saw the rebound of both developed and emerging markets international funds as a group after a dismal year in 2011.

What does all of this tell us, frankly not much as far as how to invest into the future

 An investment process is critical

Here are some of the factors that we usually look at when evaluating mutual funds and ETFs (from Fi360 and our Investment Policy Statements):

  • Does the fund have at least a three year track record?
  • Does the fund manager have at least a two year track record with the fund?
  • Does the fund have at least $75 million in assets?
  • Do the fund’s composition (its holdings) and its Morningstar style look like other funds in its investment category?
  • The fund’s expense ratio should be in the category’s 75th percentile.  (In reality we like to see this number much lower than that).
  • The fund’s risk-adjusted returns (Sharpe and Alpha) in the top 50% of its peer group of funds.
  • Trailing 1, 3, and 5 year returns at least in the top half of its peer group of funds.
  • Has the fund experienced a significant gain or loss in assets?
  • Has ownership of the fund changed?
  • Has there been turnover in the fund’s management?

While some investors may disagree, we believe in asset allocation and portfolio rebalancing.  We use both active and passive mutual funds and ETFs to fill the allocation slots in the portfolio, and we monitor those holdings on a regular basis.

As discussed above, there will always be fluctuations in the performance of various investments whether they are individual stocks or bonds or managed products such as mutual funds and ETFs.  Certain asset classes will underperform at various times (such as Foreign Stocks in 2011).  The point is to have an investment process in place that uses a disciplined methodology to make investment decisions.  In my experience, this is a key element in long-term investment success.

Feel free to contact me with questions about your investments.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Photo credit:  Wikipedia

Enhanced by Zemanta