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Friday, March 2, 2007

Chasing performance II…You Knew this Was Coming



In Mutual Funds
That Buy Overseas,
Latecomers Lose Out

By JENNIFER LEVITZ

WSJ
March 1, 2007; Page C1

This one was so predictable that I was tempted not to point this out: WSJ March 1

Richard Laudon, a Boston optometrist, opened accounts in three international-stock mutual funds in January. The results of that decision in the wake of Tuesday's global market dive "look terrible," Mr. Laudon says.

"I lost more money yesterday than some people over 55 have in their retirement accounts," he says.

Far from alone, Mr. Laudon was part of a stampede into mutual funds in January, particularly funds that invest abroad. It was an exceptional case of perverse timing in which individual investors arrived late to the party and wound up paying dearly. "There are times when you feel brilliant and times when you feel like an idiot," he says.

According to fresh data from the Investment Company Institute, a fund-industry trade group, individual investors deposited $46.89 billion in mutual funds in January, a whopping 130% increase from the $20.40 billion invested in funds in December. Particularly popular were mutual funds that invest abroad. These funds had been on a winning streak -- until they took it on the chin this week in the slide that spread partly from China's stock market….

It happens every time:

The performance of global equity funds -- U.S. mutual funds that invest in international markets -- have trounced the gains of purely domestic funds nearly since the start of this decade, making them attractive to investors.

According to the ICI data, net inflows to global equity funds were $21.1 billion in January, a 56% increase from December. It was the largest monthly inflow to the category since January 2006, when the net buying hit $23.5 billion.

Want to check what happened three months after those inflows last year ? Answer a 25% + drop from Mid May to Mid June for the emerging market index (lower chart at top of post). The drop for ( for developed international (upper chart) was 20%. Followed by outflows from the funds, followed by a recovery for the rest of 2006 . Full year 2006 return for emerging international markets : 31.4% for the develop international index it was 26.8% . Net result: many, many investors suffered losses in international investing despite the tremendous gains they would have had if they simply held the index.

While losses were spread broadly across the fund landscape Tuesday, global funds lost more than domestic funds in the downturn, Funds that invest in the Asia-Pacific region, including Japan and China, fell 4.2%. Funds that invest in a wide range of emerging markets were down 5%; and as a whole, the once-hot Latin American category did the worst, falling 7.7% in one day.

"That's always the danger of chasing performance," says Arijit Dutta, another Morningstar analyst. "These funds have done tremendously well -- we have been cautioning people to not expect this trend to continue forever."

Problem is the Morningstar website is not shy in focusing on funds in hot sectors.

Unfortunately as behavioral economists have taught us, many investors will make this mistae again.

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