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- Six Funds from Fortune - Five Thumbs Down From MAXfunds
Fortune Magazine lists 'six standout mutual funds', inexpensive no-loaders run by managers that have posted category-beating returns over the last decade:
We started by screening for funds that have outperformed their peers by the widest margins over the past ten years, using data from fund-tracking firm Morningstar. To make sure our choices would be easy to buy and affordable to own, we ruled out names that were closed to new investors and focused only on no-load offerings with minimum investment requirements of $25,000 or less. We also limited our picks to funds with expense ratios lower than the average for their category. Finally, we eliminated specialized funds, as well as those whose current managers were too new to be primarily responsible for the fund's performance record."
Here's the complete list:
- CGM Focus (CGMFX)
- Manning & Napier World Opportunities (EXWAX)
- Oakmark Select (OAKLX)
- FBR Focus (FBRVX)
- Bridgeway Ultra-Small Company Market (BRSIX)
- Artisan International (ARTIX)
While owning lower fee funds with good long term track records is better than some fund investing strategies, you’ll likely underperform the market in the next 1-3 years if you buy the funds on this list.
There are two factors working against investors in this low fee/long term success fund picking strategy: 1) funds with great performance over the long haul often attract huge amounts of money, which leads to performance problems. 2) funds with great track records often benefited from an investing style or category that was in favor in the past, but is less likely to continue going forward.
Fortune’s fund list has these problems. What has been hot relative to the S&P 500 over much of the last decade is small cap, foreign, value, and international stocks. If the same screen was done in 2000 you’d come up with a bunch of low fee Janus funds, with some tech and aggressive growth funds mixed in. These are, of course, the kind of funds that fell harder than the S&P 500 in the following few years.
I recommended CGM Focus (CGMFX) on a television broadcast a few years back, and think it is a decent, truly unique if risky fund that allows individual investors to have a reasonably priced hedge fund like product in their portfolio. However, the time to buy it is after it suffers a cold spell when other fund investors are running for the door. Unlike other funds on the Fortune list, CGM Focus benefits from bold calls made by manager Ken Heebner, not from a tailwind helping his fund’s particular strategy.
Manning & Napier World Opportunities (EXWAX) has been an Our Favorite Funds category favorite since 2002, and in our opinion is the only fund on the list that has a better than 50% shot of beating benchmarks over the next 1-3 years.
Oakmark Select's (OAKLX) Bill Nygren is one of the most overhyped managers around. He became an investing star a few years ago and has been posting mediocre performance ever since (though mainstream fund analysts still adore him). This is a guy who was completely blindsided by the mortgage mess - and he has a billion dollars worth of Washington Mutual (WM) dragging down his fund to prove it.
FBR Focus (FBRVX) is guilty as charged of cap creep (as the article notes). We generally don’t like funds that build a solid track record as a smaller cap fund, raise a ton of money, then start buying larger cap stocks.
We held Bridgeway Ultra-Small Company Market (BRSIX) (a microcap index fund) in our Powerfund Portfolios from 2002 to the end of 2004. We sold it a few years ago when the fund brought in too much money and mirco cap stocks were getting overpriced. This fund will likely be back on our recommended list when microcap stocks drop and this fund loses a few hundred million in assets.
Artisan funds are expensive but can be worth the money, but we prefer smaller new Artisan funds. Artisan International (ARTIX) is too big, but our bigger beef is more of a category criticism: there are too many international funds with over $10 billion in assets for this category of funds to do well in coming years. We owned Artisan International Small Cap (ARTJX) in our model portfolios from 2002 (when it was small and new) to 2006 and will probably buy it again in a few years after it falls and reopens to new investors.
Bottom line, keep an eye on the fund categories you are investing in – are they too in favor? Low fee performance chasing is only slightly smarter than ordinary performance chasing. Our own MAXfunds rating system looks at fees and past performance, but it also looks at measures of future trouble, like too much money flooding into a fund or fund category. Click on the above funds to see what our ratings and metrics have to say.
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- Ask MAX: Did My Fund Fall 41% In One Day?
Bobbie asks:
Can you please tell me what happened to the Fidelity Advisor Korea A (FAKAX) fund? It dropped 41% in one day. I have been holding this for many years and didn’t hear anything negative news that would have caused this."
On December 5th Fidelity Advisor Korea fund (FAKAX) paid out $3.06 worth of short term capital gains (taxed as income if you own the fund in a taxable account) and a whopping $13.03 of long term capital gains – a total of $16.09 or 42% of the fund price. These payouts are tax events – not actual drops like you see when fund investments fall.
Depending on what box you checked when you invested, you’ll either get a dividend check in the mail in the amount of 42% of your investment in the fund, or (more likely) the 42% dividend was reinvested for you into more shares of the fund. Either way you didn’t actually lose 42% of your money overnight. In fact the fund was actually up slightly on December 5th, adjusting for the distribution.
The bad news is if you own this fund in a taxable account (outside of an IRA or 401K), you’re on the hook for the taxes due on this amount come April 15th.
Distributions of this size are very rare and generally the result of a fund with a hot track record that either sees big outflows of money by shareholders or is one in which the manager decides to change the portfolio holdings significantly. Either situation means the fund has to realize capital gains on appreciated stock.
If shareholders leave the fund, the manager has to sell stock to raise cash. Selling stock in a hot fund generally means realizing capital gains - gains that have to be paid out to the remaining shareholders.
In the case of Fidelity Advisor Korea we suspect the manager sold many of the holdings in anticipation of merging the fund into Fidelity Advisor Emerging Asia (FEAAX). This merger has been planned since early this year, and the fund was closed to new investors in March. There was likely some shareholder redemptions from the fund, reducing the number of investors left to pay the distributions to.
For more on year-end fund distributions, click here.
Thanks for the question.
MAX
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- Tough Tax Year Ahead
SmartMoney reports that mutual fund investors are in for a tough April 15th. Taxes paid by mutual fund investors, muted for years by the big losses of the early 2000s, are back with a vengeance:
Fund industry experts are predicting a double whammy this year that we haven't seen since the tech bubble burst. Not only will investors be staring at flat or dismal returns, but they'll also be faced with paying taxes on big capital gains distributions from the well-performing funds they held before the recent turmoil began. Lipper senior research analyst Tom Roseen estimates that investors may pay 20% to 30% more to the federal government than the $24 billion they shelled out last year. That means th