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Tuesday, January 30, 2007

It's Not The Fund Performance It's The Time Period That Determines Fund Choice (At Least for Some)



This one is really unbelievable the WSJ writes how the turn of the year is a boon for many mutual fund performance reporting. Not because they had a particularly good year, but simply because their 5 year performance numbers no longer include the tough market performance of 2 002.

Incredibly the mere turn of the page on the calendar creates a massive change in the way individuals and pension fund consultants (can you believe that one) decide where to invest:
Some mutual funds report a flood of calls from pension consultants and others who have noticed their funds suddenly showing up as strong performers, as 2002 no longer drags down their average. Other funds are reporting renewed intake of investor cash after years of selling, as well as new interest from overseas clients.
Until recently, "the consultant and adviser community would say, 'No one wants to talk to you, because of your five-year number.' " But now, "we're at this real inflection point" where there is interest on sales calls, says Kevin Divney, a manager of the $4.7 billion Putnam New Opportunities Fund. It swung from an average 5%-a-year loss for the five years through

In other words “experts’ and individuals are choosing investments with their eyes locked firmly in the rearview mirror.

Most interestingly the change in the performance numbers is not attributable to the managers’ skill (surprise) but simply to the area of the market that they were invested in .As the article notes:

The 20 worst-performing U.S. diversified stock funds with over $1 billion, ranked by five-year annualized returns through 2005, were mostly growth funds.

From our perspective we would note 2 things: 1 these funds should be compared to a growth index not absolute returns 2. We are big believers of tilting investments towards value which long term experience has shown produces superior returns Of the funds listed in the graphic above, it seems that only one of these funds has been around for 10 years, Putnam New Opportunity with a ten year return of 4.36&


In our portfolios we do not make use of growth funds,since this category historically offers poor risk/return characteristics compared to value stocks. The large cap value fund we use: DFA Large Value has the following track record 5 yr (through 2005) 9.14, 5 yr (through 2006) 12.37, 10 year 11.92


In other words be careful how you choose funds and be careful one kind of pension consultant you hire.

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