Document 6556662

D4 Business |
2R
| SUNDAY, OCTOBER 12, 2014
MutualFunds
FANTASY FUND LEAGUE
WILL HONE YOUR SKILLS
Your Funds
Chuck Jaffe
Syndicated columnist
Let’s face
it, most
people
spend more
time playing
fantasy
football,
reading
gossipy stories or watching
cute cat videos than they do
picking and managing their
mutual funds.
That may not be entirely a
bad thing, as overthinking a
portfolio tends to lead to
making too many moves,
most of them bad ones.
But if mutual­fund invest­
ing could be as much fun as
those other things, investors
might spend more time
making better choices.
So when you get frustrat­
ed by the actions of your
fantasy football team —
which for most people hap­
pens just a few weeks into
the season — or when those
cat videos all start to look
the same, try to devote
some time to playing fanta­
sy mutual funds.
It may not seem like much
fun, but it’s more productive
than fantasy sports leagues
because your chances of
actually running a pro team
are slim and the money to
be made in most fantasy
leagues is small.
By comparison, you will
oversee investments for
years, and the financial
benefits of running a good
portfolio versus a perennial
loser are significant.
The idea is simple: Run
an imaginary fund portfolio
— or several portfolios —
aiming for specific perfor­
mance goals, tracking re­
sults to develop comfort
that extends to real invest­
ments.
There are plenty of web­
sites where you can estab­
lish and track multiple port­
folios. Pick your favorite
free site.
No one has invented a
fantasy­funds rule book and
scorekeeping system, so
here are things to consider
when setting up your own
league:
Play on your own or with
friends? This is about learn­
ing to be a better investor,
and while you can certainly
do that on your own, don’t
be shy about spreading the
game to friends, co­work­
ers, children or relatives
who would benefit from
using imaginary money to
better manage real dollars.
Let the group try different
investment ideas. If playing
with co­workers, for exam­
ple, have everyone pick a
portfolio of only funds avail­
able in your retirement
plan, and then a portfolio of
what they’d use if they left
the employer and could roll
the money into a self­direct­
ed IRA. That will help you
all better learn the retire­
ment plan, while also pre­
paring you to trust your
picking ability if you leave
the company and can up­
grade the portfolio.
What target are you aim­
ing for? Playing for maxi­
mum returns encourages
risk­taking beyond what the
normal investor can stand
in real life (moves like using
leveraged funds to juice
returns, which can also
blow up a portfolio).
You’ll get the most from
this game if your team only
includes funds you might
actually want to own in real
life.
If you play solo, use your
own objectives as a goal. If
you need a 12 percent an­
nual return to comfortably
reach your goals, make that
your target.
In a fantasy­funds league
with friends, make the
target a common goal, with
risk or volatility factored in.
If you spread money
through six funds in differ­
ent asset classes, you might
shoot for a 2.5 percent quar­
terly return, awarding
points for coming close to
the target and subtracting
points for falling below it.
How long does your sea­
son run? Investing season
never ends, but mutual­
fund portfolios don’t require
constant attention and
upkeep, so you can run a
league for, say, a three­year
stretch without having
players checking results
constantly.
Set up interim rewards
for quarterly or annual
performance and consisten­
cy, but try to make this
something that fits your
investment style, meaning
that you shouldn’t be look­
ing at or managing your
fantasy portfolio any more
than you do your real­life
investments.
What are the rules? Try to
build asset­allocation skills;
studies show that how you
spread money around is the
biggest determinant of
performance, larger even
than which funds actually
get picked.
Don’t make your fantasy­
fund portfolio any more
complicated than what
you’d want to run in real
life, or you will have a hard
time turning your make­be­
lieve into a future reality.
To hone your selection
skills, limit your choices to
one fund per asset class. A
fantasy “team,” therefore,
might include six or seven
picks, say one aggressive
growth fund, a large­cap, a
small­cap, a bond fund, an
international and/or
emerging­market fund, and
maybe a sector fund or
some other wild card.
List three reasons for
picking each fund; as the
game progresses, this will
show how your logic stands
the test of time.
Make the amount of play
money you are investing
realistic, a sum you either
have to manage now or
could see yourself running
in the future. That will
make wins, losses and un­
derperformance that much
more meaningful.
Track all costs associated
with transactions, including
all expenses that come with
changing your mind. If you
sell a fund that has made
money, deduct applicable
capital­gains taxes before
reinvesting the proceeds.
What are the prizes?
Decide if there’s a small pot
or if laggards buy lunch at
predetermined time check­
ins, but remember that the
real prize here is that play­
ing will make you a better
investor, which means this
is the rare game where
everyone really can be a
winner just for participat­
ing.
Chuck Jaffe is senior columnist for
MarketWatch.
He can be reached at
cjaffe@marketwatch.com or at
P.O. Box 70,
Cohasset, MA 02025­0070.
Copyright 2014, MarketWatch
Money follows Gross to Janus
fund. The shares have since
declined.
Bill Gross’ Janus Global
Gross, who co­founded
Unconstrained Bond Fund
Pimco in 1971 and ran the
received $66.4 million in
world’s largest bond mutual
deposits in September, the
fund, left the firm after his
month Gross announced he deputies threatened to quit
was leaving Pacific Invest­
and management debated
ment Management Co.
his ouster, according to
(Pimco) to join Janus Capi­ people familiar with the
tal Group.
matter.
The client cash brought
Gross’ $201.6 billion
assets at the fund, which
Pimco Total Return Fund
Gross started managing this had a record $23.5 billion in
past week, to $79.1 million, redemptions in September,
according to fund research­ Pimco has said. Two other
er Morningstar.
large funds that Gross man­
Janus shares soared 43
aged, the $18.3 billion
percent Sept. 26, the day
Pimco Unconstrained Fund
Gross announced he would and the $20 billion Pimco
work for the firm, on the
Low Duration Fund, also
expectation that he would
experienced withdrawals,
attract a considerable
according to Morningstar
amount of money to his new estimates.
By CHARLES STEIN
Bloomberg News
Fund Tracker
Weekly spotlight on mutual fund performance
Winners and losers: A mutual­fund scorecard
Fund Wkly % YTD %
obj return return
Biggest funds
American Funds A AmcpA p
American Funds A AMutlA p
American Funds A BalA p
American Funds A BondA p
American Funds A CapIBA p
American Funds A CapWGA p
American Funds A FdInvA p
American Funds A GwthA p
American Funds A HI TrA p
American Funds A IncoA p
American Funds A ICAA p
American Funds A N PerA p
American Funds A SmCpA p
American Funds A WshA p
BlackRock Instl StrIncoOpp
BlackRock Instl EquityDv
BlackRock Instl GlbAlloc r
Dimensional Fds EmMCrEq
Dimensional Fds EmMktV
Dimensional Fds USLgVa
Dodge&Cox Balanced
Dodge&Cox Income
Dodge&Cox IntlStk
Dodge&Cox Stock
DoubleLine Funds TRBd I
FPA Funds FPACres
Fidelity Freedom FF2020K
Fidelity Freedom FF2030K
Fidelity Invest Balanc x
Fidelity Invest Contra
Fidelity Invest GroCo
Fidelity Invest LowP r
Fidelity Invest Puritn x
Fidelity Invest TotalBd e
Fidelity Spart Adv 500IdxAdv
Fidelity Spart Adv TotMktAd r
Frank/Temp Frnk A IncomA p
Frank/Tmp Frnk Adv GlbBdAdv
Harbor Funds CapApInst
Harbor Funds Intl r
Loomis Sayles LSBondI
Metro West Fds TotRtBdI
Oakmark Funds I EqtyInc r
Oakmark Funds I Intl
Oakmark Funds I Oakmark
Oppenheimer Y DevMktY
PIMCO Instl PIMS AlAsetAut r
PIMCO Instl PIMS AllAsset
PIMCO Instl PIMS TotRt
PIMCO Funds Instl Income
Price Funds BlChip
Price Funds CapApp
Price Funds EqInc
Price Funds EqIndex
Price Funds Growth
Price Funds MidCap
Price Funds N Horiz
Price Funds N Inc
Price Funds Ret2020
Price Funds Ret2030
Price Funds Value
Schwab Funds S&P Sel
Vanguard Admiral 500Adml
Vanguard Admiral GNMA Ad
Vanguard Admiral HlthCr
Vanguard Admiral ITAdml
Vanguard Admiral ITGrAdm
Vanguard Admiral LtdTrAd
Vanguard Admiral MCpAdml
Vanguard Admiral PrmCap r
Vanguard Admiral STIGrAd
Vanguard Admiral SmCAdm
Vanguard Admiral TtlBAdml
Vanguard Admiral WellslAdm
Vanguard Admiral WelltnAdm
Vanguard Admiral WdsrIIAd
Vanguard Fds TotIntBInv
Vanguard Fds DivdGro
Vanguard Fds STAR
Vanguard Fds TgtRe2015
Vanguard Fds TgRe2020
Vanguard Fds TgtRe2025
Vanguard Fds TgRe2030
Vanguard Fds TgtRe2035
Vanguard Fds TgtRe2040
Vanguard Fds TgtRe2045
Vanguard Idx Fds TotlIntl
XC
LV
BL
IB
BL
GL
LC
LG
HC
BL
LC
GL
GL
LC
GT
EI
MP
EM
EM
LV
BL
IB
IL
LV
MT
MP
MP
MP
BL
LG
XG
MC
BL
IB
SP
XC
BL
WB
LG
IL
GT
IB
BL
IL
LC
EM
MP
MP
IB
GT
LG
BL
EI
SP
LG
MG
SG
IB
MP
MP
LV
SP
SP
MT
HB
IM
IB
SM
MC
LC
SB
SC
IB
BL
BL
LV
WB
EI
BL
MP
MP
MP
MP
MP
MP
MP
IL
XC
SP
XC
Vanguard Idx Fds TotStk
Vanguard Instl Fds InstIdx
Vanguard Instl Fds InsTStPlus
5­yr %
return
­3.5 +4.2 +14.6
­2.7 +3.3 +13.1
­2.0 +3.2 +11.9
+0.7 +5.0 +4.7
­1.7 +2.6 +8.8
­2.9 ­0.1 +8.9
­3.7 +1.3 +12.8
­4.2 +1.3 +12.8
­1.1 +1.2 +8.7
­2.2 +3.5 +11.2
­3.3 +5.1 +13.1
­4.1 ­3.7 +9.9
­3.8 ­5.2 +10.4
­2.9 +3.9 +14.7
­0.3 +3.1 +6.3
­2.8 +1.6 +12.4
­2.1 ­0.4 +6.5
NA
NA
NA
NA
NA
NA
NA
NA
NA
­2.7 +3.6 +12.4
+0.4 +5.3 +5.5
­3.5 ­0.8 +7.8
­4.3 +2.6 +14.7
NA
NA
NS
­2.0 +1.7 +10.4
­2.0 +1.2 +8.1
­3.0 +0.1 +8.9
­2.6 +4.3 +11.0
­3.8 +2.0 +14.4
­4.5 +2.1 +16.5
­2.7
0.0 +14.7
­2.7 +4.6 +11.2
+0.6 +5.2 +5.6
­3.1 +4.7 +14.5
­3.4 +3.0 +14.6
­2.0 +3.3 +10.4
­0.5 +3.1 +6.6
­4.0 +2.1 +14.3
­3.3 ­8.4 +6.1
­0.5 +4.4 +9.3
+0.5 +5.2 +7.3
­2.6 +0.6 +9.2
­2.3 ­9.9 +9.3
­3.9 +3.0 +15.6
­1.4 +0.1 +8.0
NA
NA
NA
NA
NA
NA
+0.5 +4.2 +5.3
NA
NA
NA
­4.1 +0.7 +16.1
­1.8 +5.2 +12.5
­3.4 +0.2 +12.6
­3.1 +4.6 +14.3
­4.2
0.0 +15.6
­4.1 +0.3 +15.4
­5.2 ­5.4 +19.5
+0.6 +5.3 +4.6
NA
NA
NA
NA
NA
NA
­4.5 +2.9 +14.6
­3.1 +4.7 +14.5
­3.1 +4.7 +14.6
+0.3 +5.6 +4.2
­2.4 +16.7 +19.4
+0.6 +7.0 +4.6
+0.8 +5.7 +6.6
+0.2 +2.0 +2.2
­4.1 +2.0 +15.6
­4.6 +7.0 +15.5
+0.4 +2.1 +3.3
­4.7 ­4.2 +14.8
+0.7 +5.2 +4.3
­0.6 +5.1 +9.6
­1.7 +4.5 +11.0
­3.1 +3.6 +13.6
+0.2 +6.6
NS
­2.2 +3.4 +14.2
­2.1 +2.4 +9.7
­1.4 +2.8 +8.7
­1.8 +2.6 +9.3
­2.1 +2.3 +9.8
­2.4 +1.9 +10.3
­2.7 +1.5 +10.8
­2.9 +1.1 +11.0
­3.0 +1.1 +11.0
­3.1 ­4.9 +4.5
Best performers
+3.0 +14.5
+4.7 +14.6
+3.2 +14.7
Fund Wkly % YTD %
obj return return
SQ
SQ
SQ
SQ
SQ
SQ
SQ
AU
SQ
SQ
LU
GT
SE
AU
AU
SQ
SQ
LU
AU
LU
AU
LU
RE
LU
RE
RE
RE
SQ
RE
RE
­36.5
­36.4
­30.8
­31.3
­16.2
­15.3
­18.0
­6.8
­15.9
­16.4
+11.3
+10.3
NS
­9.3
­11.1
­11.5
­6.4
+9.1
­10.7
+7.9
­11.8
+8.0
+16.3
+7.4
NS
+15.6
+14.8
+19.3
NS
+15.6
Fund Wkly % YTD %
obj return return
5­yr %
return
Rydex Investor ElectInv
Direxion Fds NatRBull2X
Fidelity Selects Electr
Baron Funds Energy
ProFunds Inv Cl InternetUlt
ProFunds Inv Cl UltMidCap
Oberweis Funds MicroCap
Oberweis Funds EmergGr
Waddell & Reed Adv ScTechA
Integrity Viking WillBasA p
ProFunds Inv Cl Oil&Gas
Turner Funds EmgGrwth
Columbia Class A SelComm A
HodgesFd
Ivy Funds SciTchA p
Jacob Funds USSmCG I
BlackRock A Eng&ResA
Rydex Dynamic NasdStrH
Vanguard Fds CapValue
Fidelity Selects NtGas
Columbia Class A GlobTech
Fidelity Selects EngSv
Fidelity Selects ComEquip
ProFunds Inv Cl BasicMatls
Turner Funds SmlCpGr
Firsthand Funds TechOppt r
Fidelity Selects Trans
Saratoga Adv Tr LgCpVlI r
Waddell & Reed Adv EnergyA t
RS Funds TechnolA
TK
SE
TK
NR
SQ
SQ
SG
SG
TK
NR
SQ
SG
TK
XG
TK
SG
NR
SQ
XC
NR
TK
NR
TK
SQ
SG
TK
SE
XC
NR
TK
+7.7
+7.7
+6.1
+6.1
+5.4
+4.2
+3.4
+3.1
+3.1
+2.9
+2.7
+2.7
+2.6
+2.6
+2.6
+2.5
+2.2
+2.1
+2.1
+2.0
+2.0
+1.9
+1.9
+1.8
+1.8
+1.8
+1.8
+1.7
+1.7
+1.7
5­yr %
return
­20.1
­19.8
­12.2
­12.3
­2.3
­5.7
­8.2
+8.9
­6.2
­6.4
+33.7
+27.1
+3.7
+4.3
+8.0
­6.3
­1.6
+23.8
+3.6
+19.4
­5.8
+19.3
+17.6
+18.2
+17.2
+15.9
+15.9
+21.2
+16.7
+15.7
ProFunds Inv Cl UltShNq100
Rydex Dynamic InvNasdSt H
Rydex Dynamic InvSP5St H
ProFunds Inv Cl UltBear
Leuthold Funds GrizzlyShrt
Federated A PrudBear p
Comstock Partners CapVlA
Tocqueville Fds Gold t
Rydex Investor InvS&P5St
ProFunds Inv Cl Bear
Vanguard Instl Fds ExDurTreas
Rydex Investor GovBdStrat
Invest Managers MgdFutSt I
Invesco Funds A GoldPrec p
GAMCO Funds GoldAAA
Direxion Fds LatAmBull
GAMCO Funds MathrAAA
Wasatch USTryFd
Wells Fargo Adv A PrecMtlA
Vanguard Admiral LTsyAdml
Oppenheimer A Gold p
Fidelity Spartan SpLTTrAd r
John Hancock Cl 1 RE Sec
Price Funds USTLg
Fidelity Spart Adv REIdx Adv
Oppenheimer A RealEstA
Ivy Funds RealEstA p
ProFunds Inv Cl RealEst
Fidelity Invest REEq F
Frank/Temp Frnk A ReEScA p
Worst performers
­3.4
­3.1
­3.4
­12.0
­11.9
­9.5
­8.9
­8.8
­8.7
­8.7
­8.5
­8.4
­8.3
­8.2
­8.1
­8.1
­8.0
­8.0
­7.9
­7.9
­7.8
­7.8
­7.6
­7.6
­7.6
­7.6
­7.5
­7.5
­7.4
­7.3
­7.2
­7.2
­7.1
+1.7
­12.3
+10.9
­3.5
­8.4
­6.5
­17.2
­18.8
­8.5
­3.2
­8.4
­15.0
+6.7
+1.6
­6.6
­8.8
­11.8
+14.5
­2.7
­1.8
+6.0
­8.1
­0.4
­3.4
­10.8
+3.3
+8.0
­0.4
­2.1
­9.6
+6.3
+3.2
+13.3
NS
+26.7
+23.9
+9.9
+10.3
+15.2
+15.6
+10.5
+12.7
+10.8
+14.9
+14.9
­1.3
+0.1
+33.9
+13.4
+3.5
+10.7
+6.1
+7.9
+9.7
+12.4
+14.3
+20.8
+12.8
+7.1
+12.9
Footnotes: e: Ex capital­gains distribution. f: Previous day{rsquo}s
quote. n or nl: No upfront sales charge. p: Fund assets are used to
pay for distribution costs. r: redemption fee or contingent deferred
sales load may apply. s: Stock dividend or split. t: Both p and r. x: Ex
cash dividend. NE: Data in question. NS: Fund did not exist at the
start date. NA: No information available.
Key to abbreviations and footnotes:
Fund objectives: AB: Long­term top­grade corporate and govern­
ment bonds. AU: Gold oriented. BL: Balanced. EI: Equity income.
EM: Emerging markets. EU: European region. GL: Global (includes
U.S.). GM: General municipal bond. GT: General taxable bond. HB:
Health and biotech. HC: High­yield taxable bond. HM: High­yield
municipal bond. IB: Intermediate­term investment­grade corporate
bond. IG: Intermediate­term Treasury/government debt. IL:
International (outside U.S.). IM: Intermediate­term municipal bond.
LC: Large­cap core. LG: Large­cap growth. LT: Latin American. LU:
Long­term Treasury/government debt. LV: Large­cap value. MC:
Mid­cap core. MG: Mid­cap growth. MP: Mixed portfolio (stocks and
bonds). MT: Mortgage. MV: Mid­cap value. NM: Insured municipal
bond. NR: Natural resources. PR: Pacific region. SB: Short­term
investment­grade corporate bond. SC: Small­cap core. SE: Sector
(specific industries). SG: Small­cap growth. SM: Short­term munici­
pal debt. SP: S&P 500. SQ: Specialty diversified equity. SS: Single­
state municipal debt. SU: Short­term Treasury/government debt.
SV: Small­cap value. TK: Science and technology. UN: Unclassified.
UT: Utility. WB: World bond. XC: Multi­cap core. XG: Multi­cap
growth. XV: Multi­cap value
5­year % return: Annualized performance over the past five years.
Top 5 mutual funds by objective, year­to­date % return
YTD %
return
Mid­cap core
InstAX­fd r +16.7
AME Fd
+15.9
EmgMkts I +7.0
EmMktI
+6.6
EmMktSC p +6.6
Stewart Capital
Longleaf Partners
Columbia Class Z
Lazard Open
Dreyfus
Emerging markets
Price Funds
Price Funds
Westwood Funds
Virtus Funds I
Templeton Adv
YTD %
return
Equity income
Federated Instl
Paydenfunds
Invesco Funds A
Touchstone Family
Amer Century Inv
StrValDvIS
ValLdrs
Utilities p
PrYldEq Y
EqInc
Health | biotech
Health
HlthCrA r
GlblWell
HlthCr
GlblHlthA
Fidelity Selects
Fidelity Adv Foc A
Allianz Funds D
Vanguard Admiral
Putnam Funds A
Global
Lazard Instl
Brookfield Fds
Cohen & Steers
Virtus Funds A
Vanguard Fds
GblInfra I
GblLstInf Y
GblInfra I
GlbInfraA p
GblMnV Inv
IntlOppt r
WldEqIncA
Canada
Intl I r
IntlMgdVol
Vanguard Admiral
BMO Funds
Vanguard Fds
Fidelity Invest
Vanguard Instl Fds
PrmCap r
LowVolEq I
PrmcpCor
StrDvIn
StlCPlus
SmallC p
USSmMid I
SmlCpA p
SmCapV
SmCapI
Invesco Funds A
Lazard Instl
Fidelity Advisor A
Wasatch
Diamond Hill Fds
+19.8
+19.5
+16.8
+16.7
+16.3
Invest Managers
Invest Managers
Oppenheimer A
Oppenheimer Y
Center Coast
YTD %
return
Pacific region
+8.3
+7.4
+6.7
+5.5
+5.0
+4.8
+1.8
+1.7
+0.6
­0.1
+7.0
+6.7
+6.7
+6.5
+6.3
+6.0
+4.7
+3.2
+2.8
+2.7
YTD %
return
Small­cap core
Natural resources
YTD %
return
Large­cap core
Mid Cap
SmCap
MdCpVlZ p
USMidC O
ActMidA
YTD %
return
YTD %
return
International
Wasatch
GuggenheimFunds
Fidelity Invest
IVA Funds
Allianz Fds Instl
+8.0
+8.0
+7.5
+6.0
+5.5
YTD %
return
+1.2
­0.5
­1.6
­1.6
­1.9
YTD %
return
MLP&Engy +13.7
MLP&EnI I +13.1
StlpthAlpha +12.2
Alpha Y
+9.7
MLPFoc I
+8.7
YTD %
return
Matthews Asian IndiaInv r +49.1
Frank/TempFrnkA IndiaGrA p +33.6
Eaton Vance A
GrIndia t
+32.0
EuroPac Funds
AsiaSmCoA +6.9
Neubrgr&BermFds GtChinEq I
+6.6
Science | technology
Price Funds
Fidelity Selects
USAA Group
ColumbiaClass A
ColumbiaClass A
GlbTech
Electr
SciTech
SelComm A
GlobTech
Gold oriented
Tocqueville Fds
GAMCO Funds
OCM Funds
First Eagle
Invesco Funds A
Gold t
GoldAAA
GoldInv t
SGenGld p
GoldPrec p
YTD %
return
Sector
ConStap
Trans
ConsStapl
MgdFutSt I
Air
Fidelity Selects
Fidelity Selects
ICON Fds
Invest Managers
Fidelity Selects
YTD %
return
Balanced
IdxAstAll A
GrTxStr
MnSkAd p
Balan
RetInc
Wells Fargo Adv A
USAA Group
Federated A
St FarmAssoc
Advance Capital I
Intermediate bond
CutwSelInc
CorPlsFxI
CorpInco I
USIntrBdA
CorePlus I
Invest Managers
MorganStanleyInst
BMO Funds
Guggenheim Funds
Western Asset
Long­term bond
LTBnd
LTGrAdml
ExtDrGS4
ExtDurI
CorpInc
Vanguard Idx Fds
Vanguard Admiral
GuideStone Funds
Del Inv Instl
Price Funds
YTD %
return
Long­term U.S.
+13.5
+10.9
+6.8
+6.7
+6.0
VanguardInstlFds
Wasatch
Vanguard Admiral
Fidelity Spartan
Price Funds
YTD %
return
Mortgage
+8.9
+8.0
+4.7
+4.7
+4.3
Managed Acct Srs
Legg Mason A
Deutsche Trust
Vanguard Admiral
SEI Portfolios
+8.3
+8.0
+5.0
+3.7
+2.6
ExDurTreas
USTryFd
LTsyAdml
SpLTTrAd r
USTLg
+9.1
+6.1
+6.0
+5.8
+5.6
YTD %
return
+7.9
+7.3
+7.2
+7.1
+7.0
YTD %
return
+16.6
+15.4
+14.8
+14.5
+8.2
YTD %
return
+33.7
+23.8
+19.4
+19.3
+18.2
YTD %
return
US MrtgInst
WAMtgBkA
GNMA S
GNMA Ad
GNMA A
+6.7
+6.0
+5.7
+5.6
+5.6
BEARING
DOWN ON
MANAGED
FUNDS
Investing
Scott Burns
Syndicated columnist
Q: While
meeting
with my
financial
advisers
recently, I
raised this
question:
Why do we
have a significant portion
of my equity allotment in
managed mutual funds
when index funds outper­
form actively managed
funds 80 percent of the
time?
The answer I received is
that in rising bull markets,
index funds indeed trump
actively managed funds.
But when markets are
flat or declining, actively
managed funds are superi­
or. What does the research
show?
A: The answer you re­
ceived is interesting, but it
isn’t useful.
Index funds are fully
invested at all times. Man­
aged funds tend to carry
cash balances to meet
redemption needs.
Holding cash tends to
reduce losses in bear mar­
kets. It also dilutes gains in
bull markets compared to
a fully invested benchmark
index.
We can see some of this
in the performance of
managed funds over time
periods out to 10 years.
Over the 12 months end­
ing Aug. 31, Morningstar
data show that the average
performance of all man­
aged large­blend funds
trailed the S&P 500 by
2.16 percentage points.
They trailed the index by
1.72 percent annually over
the last three years and
1.61 percent annually over
the last five years.
Since these periods
include most of the recov­
ery since mid­2009, that’s
a good indication that
managed equity funds are
likely to trail fully invested
index funds during bull
markets.
Over the last 10 years —
a period that includes the
crash of 2008 and early
2009 — the same group of
funds trailed the S&P 500
Index by only 0.44 percent
a year.
Over the last 15 years, a
period that includes two
major market crashes, the
average managed fund
actually beat the index by
0.62 percent. This suggests
that managed funds are at
a smaller disadvantage
during bear markets.
All of this is interesting,
but not very actionable.
If your adviser was so
convinced of the index­
fund advantage during
bull markets, you might
ask him why wasn’t he
committed to index funds
over the last five years? My
bet is that he will be a bit
tongue­tied.
This kind of information
has no value unless your
adviser happens to know
when bull and bear mar­
kets begin and end. Lots of
people make claims about
doing that, but the claims
don’t hold up to close ex­
amination. Mark Hulbert,
editor of the Hulbert Fi­
nancial Digest, demon­
strates this on a regular
basis in his newsletter. He
has done it for decades.
The most fundamental
question we face is how
much we are willing to pay
for a chance to beat the
market.
If you know that, on
average, only 30 percent of
managed funds can beat
their benchmark and the
cost of management over
an index fund is 1 percent
(really, it is a good deal
more), then we need a
good shot at getting an
additional 3.33 percent
annualized gain
(1.00/0.30) to avoid the
experience of buying bad
lottery tickets. Basically,
managed funds are a los­
ing bet.
Questions:
scott@scottburns.com
Copyright 2014,
Universal Press Syndicate