Welcome to the brink of autumn. It’s back to school time! My students are all in their places, with bright, shiny faces. My portfolio and I are both wondering where the summer went. I’m guessing that fund manager Ken Heebner, who managed to lose about 20% of his investors’ money over the summer months, is now looking ahead to winter. He's already had his fall -- a big, nasty one.
Time to celebrate, my fellow dumb-money bunnies!
Investors are, on whole, bad for their own financial health. Our decisions are motivated, alternately, by greed and fear. Since we tend to focus on events in the recent past, rather than seeing the longer-term (past or future), we tend to get greedy well after the easy money has been made. And we start selling just about the time that our investments have hit bottom. We’re so consistent in this behavior that it’s actually possible to consistently make money by simply doing the opposite of what everyone else is doing (this was essentially Morningstar’s now-abandoned "buy the unloved" strategy). Innumerable scholars, using a variety of different measures and time-frames, have come to the same discouraging conclusion: we’re dumb. Some of the most recent research, a 2006 study by Andrea Frazzini of The University of Chicago and Owen Lamont of Yale, puts it this way:
Our main result is that on average, retail investors direct their money to funds which invest in stocks that have low future returns. To achieve high returns, it is best to do the opposite of these investors. We calculate that mutual fund investors experience total returns that are significantly lower due to their reallocations. Therefore, mutual fund investors are "dumb" in the sense that their reallocations reduce their wealth on average. We call this predictability the "dumb money" effect.
Their work led Daniel Gross of Slate magazine to ask the pointed question, "Why are you dumb money?"
Well, huzzah! If they’re right, we might be hopeful of better times ahead. Why? Because we’ve been yanking money from the market at unprecedented rates for an unprecedented stretch. Charles Biderman, who studies fund asset flows for TrimTabs.com, offered this "bit of encouraging news" on August 12th:
…one of the basic tenets of liquidity theory is that flows at extremes are an excellent contrary indicator. We now have statistical evidence that U.S. equity fund flows, in particular, are indeed an excellent contrary indicator at extremes. . . U.S. equity funds posted outflows in 13 of the past 15 months, even though the S&P 500 rose in six of these 15 months. Not since the aftermath of the 1987 stock market crash, from October 1987 through December 1988, have U.S. equity funds posted outflows in 13 out of 15 months. ("Flow Out Of Funds Reaches Extreme," Forbes.com, 8/12/08).
The outflows continued in August, though the amounts varied greatly from week to week. In the last week of August, for example, folks pulled $511 million from equity funds but pulled over $5 billion the week before.
Investors yanked $26 billion from their funds in July and so August, predictably, saw gains in every major U.S. stock and bond index ranging from 3.6% for the Russell 2000 to 0.6% for short-term U.S. government bonds.
September and October are, historically, ugly months in the stock market. If fund outflows continue through those two months, you might profitably ask yourself: "Isn’t it about time to start doing the opposite of what the dumb bunnies are doing?"
By way of personal disclosure, I’m trying to do that very thing. On August 14th, on the FundAlarm discussion board, "Whakamole" asked if anyone was "still into the Utopia funds." No one ‘fessed up to being dumb enough to sink money into a fund that pretty consistently trails 90% of its peers.
Let me, belated, raise my hand: Yup, I own Utopia Core (UTCRX) and I’m buying more of it. I’m not doing it because I’m happy with the fund’s performance. To the contrary, I think its short-term record is appalling and I’ve got the urge to run away and hide. But, instead, I’m adding to my account. Why? Because the management team hasn’t changed, the managers haven’t changed what they’re doing, the expenses haven’t changed, and the reason I found the fund intriguing (a focus on sustainability, broader global exposure, and a willingness to try unconventional securities) hasn’t gone away. They’re exposed to renewable energy and Asian stocks, sectors which have dropped 25-40% this year. Nonetheless, I suspect that sustainable energy and Asia are good places to be . . . and so, here I am.
Sheepishly but not quite willing to be sheep-like.
Okay, Jonathan, and what were the other ones?
The estimable Jonathan Burton reported that, "Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date . . . Nancy Tooke runs three of them" ("Up and away," MarketWatch, 08/27/2008). But since Ms. Tooke’s Eaton Vance charges all carry sales loads, one might reasonably ask who the other elite 14 are. Here’s the list:
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While short-term performance lists are unreliable as investing guides, they can give folks leads on interesting possibilities that we might otherwise have ignored. FBR, Parnassus, Royce and WHG are all fine, consistent and consistently fine fund families. The Frontegra folks have started to launch some interesting, underfollowed funds. They’re worth some thought.
"[T]hey may be eating themselves alive."
Oh, dear God. First it was "the ETF deathwatch." Now we’re treated to autophagy among the Vanguard funds. Sam Mamudi, writing for MarketWatch, reports the Vanguard’s managed payout funds are mostly managing to payout all of their investors’ original investments: about 79% of the payout to investors is simply the return of their original capital. ("Managed payout funds show flaws," 8/22/08).
I warned of this outcome in last month’s profile of Baron Retirement Income fund, Baron’s version of a managed payout fund: Such funds are a great idea in the long-run, but "you may starve in the near-term." The basic problem is that these funds absolutely guarantee you a payout equal to 4% of the previous year’s net asset value. If the fund doesn’t have at least 4% in unrealized gains on the books, the only possible avenue is giving back part of your original investment. Far from being a hypothetical concern, it now appears to becoming standard operating practice for a whole cash-strapped set of funds.
And you thought the Sports Illustrated Cover jinx was bad!
On August 11th, Barron’s announced its list of top 100 fund managers. Using data through June 2008, they named Jan-Wim Berks of ING Russia, Kenneth Heebner of CGM Focus and Roger Hamilton of J Hancock Large Cap Equity as their top three managers. To celebrate the honor, these crème de la crème managers spent the summer losing 32%, 20% and 13% respectively. Those performances meant that those funds trailed 100%, 99% and 94% of their peers, respectively. ("They’re the Tops," Barrons, 08/11/2008).
Wasatch continues rounding out its line-up
Wasatch announced in late August its decision to acquire the three First Source Monogram funds: Income Equity (FMIEX), Long/Short (FMLSX), and Income (FMEQX). The deal strikes me as a good thing all around. The funds all keep their management teams, which is good because these have been consistently solid performers. Income Equity, an equity income fund, is the strongest of the bunch (top 1% returns over the preceding 3-, 5- and 10-year periods) but Long/Short is in the top tier of long-short funds over the past five years and Income has returned consistently in the top third of its short-term bond peer group. These funds plug big holes in the Wasatch fund line-up, which has been dominated by aggressive small-cap and international offerings. And, with any luck, better marketing and the greater efficiency permitted by combined resources may help reduce the funds’ regrettably high expense ratios.
Wasatch has already proven to be an innovative, shareholder friendly company. Adding these funds, which will bring the Wasatch line-up to 18, will likely help.
Fund Updates: Round Three
This month we’ve updated the profiles of four very different funds, all of which offer intensely focused portfolios. Here are the links to this month's updates (scroll to the bottom of each page to find the update):
Now that "the summer driving season" has come to its end and gas prices have dropped 15% or so, you might consider a gesture of support for FundAlarm. None of what FundAlarm offers –- these fund profiles, the 232,000 discussion board messages, the tables of fund manager changes and of 3-Alarm and Most Alarming 3-Alarm Funds –- would be possible for long without your support. Really. You can make a direct contribution using Amazon’s honor system or you can buy pretty much anything through Amazon (they’ve got some really good prices on 32" LCD televisions – trust me, I know) and help support the site. The details, as always, are
here. And if you just need to see if anyone else is silly enough to suspect that the world’s not ending, perhaps you should visit the Discussion Board and talk through some fund possibilities with the remarkably generous souls who populate the board.Keep those cards and letters coming. Roy and I are always fascinated to read your insights, suggestions and criticisms. Here’s the
link. As ever,David
| NEW Discussed this month: | ||
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| Westcore Micro-Cap Opportunity (WTMIX): Low expenses, a cautious approach to a volatile universe, and a well-experienced team. What’s not to like? | ||
Gabelli SRI Fund will invest substantially all of its assets in common and preferred stocks of companies that meet its guidelines for social responsibility. The fund may also invest in foreign stocks and convertible securities. The Fund will not invest in the top 50 defense/weapons contractors or in companies that derive more than 5% of their revenues from tobacco, alcohol, gaming, defense/weapons production and companies involved in the manufacture of abortion related products. It will also screen out polluters. Managed by Christopher Desmarais. 2.0% e.r. after waivers $1,000 investment minimum, $250 for IRAs, with the minimum waived for accounts with an automatic investing plan. | |
The Kids Fund is a mutual fund that invests in companies that appeal to, or market goods and services to, youth and young adults. The manager will be Will Hepburn of Hepburn Capital Management. Mr. Hepburn hasn’t previously managed a mutual fund but did work as an investment advisor representative for Cambridge Investment Research, a broker/dealer. $1000 minimum investment. The Kids will be paying a 5.75% front load and 2.65% annual expenses which, all by itself, might be a valuable lesson in careful spending for them. | |
Manning & Napier Yield will use a passive quantitative strategy to provide market-like returns "while also providing a level of capital protection during market downturns." They’ll buy mid- to large-cap stocks of companies with high free cash flow, comparative high dividend yield, and a fair degree of financial security. The fund will be team-managed. 0.60% e.r. The initial minimum investment is $2,000. | |
Riverfront Long-Term Growth Fund will seek long-term capital appreciation. The fund will invest in a global, all-cap stock portfolio but might well toss in preferred stocks and convertible securities, high-yield debt securities, and securities linked to alternative investments such as commodities, real estate and foreign currencies, ETFs and cash. It will be managed by a four-person team of former Wachovia Securities professionals, including Wachovia’s former Chief Investment Officer, Chief Investment Strategist, Chief Equity Strategist and Chief Fixed Income Strategist. Wow! 1.15% e.r. The minimum is $2500 for regular accounts and $1000 for IRAs. | |
T. Rowe Price Global Large-Cap Stock seeks long-term growth of capital through investments primarily in the stocks of large, well-established companies throughout the world, including the U.S. The fund will be managed by a sort of all-star committee headed by Scott Berg. Expenses capped at 1.0%. $2500 investment minimum, $1000 for IRAs, with the minimum waived for accounts with an automatic investing plan. The fund will launch October 27, 2008. |
| NEW Discussed this month: | ||
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| Matthews Asian Growth & Income (MACSX): A skeptic might describe this fund as large, old and underperforming. A mean skeptic might point out that it shares those characteristics with me. While a 14-year-old fund with $2 billion in assets and weak relative returns would not normally qualify as any sort of star, Matthews’ strengths are impressive and it’s available again to new investors for the first time in four years. | ||