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Wednesday, September 23, 2009

Mutual Fund Investors Are Getting The Message...... least I hope so. Based on this wsj article they may be (finally) concluding they are better off with passive (index) instruments rather than actively managed funds. Or they could simply be chasing performance in reaction to last year's results and will be back into to active funds after a year of better returns.

In any case it seems pretty clear that one of the main points used in marketing actively managed funds proved false. Prospective investors were told active managers would protect them in down markets it proved not to be the case.Of course the WSJ can't resist implying that investors ought to be looking to reenter those active funds. My bolds and italics


Fallen Fund Stars Find Fewer Takers
Magellan and Others Rebound, Not Inflows


Some prominent mutual funds have made spectacular comebacks this year, but the investor dollars aren't following.

Fidelity Magellan, Legg Mason Value Trust and Dodge & Cox International Stock are among the funds beating the markets again. But investors haven't forgotten their abysmal showing in 2008 and early 2009, and many funds still are hemorrhaging cash.

After pulling $172 billion from stock funds in 2008, individual investors have begun edging back. Stock-fund inflows, or net buying, are slightly positive in 2009. But the gains are going to index funds; actively managed stock funds continue to experience outflows.

By Morningstar Inc.'s reckoning, $11.6 billion in fresh investments have gone into index funds this year, versus $5.6 billion pulled out of actively managed funds overall. In 2006, when stock funds pulled in $202 billion, just 14% of that went into index funds.

"The managers didn't protect investors on the downside," says Karen Dolan, director of fund analysis at Morningstar. "So some investors have thrown in the towel."

Dodge & Cox International lost 47% in value during 2008, when the Standard & Poor's 500-stock index was down 37%.

This year, the fund has come roaring back, racking up returns of 45% (price appreciation plus dividends) versus the S&P index's 20%. The financial-services and emerging-market investments (yes, but the vanguard emerging markets etf (vwo) is up 65.5%) that hurt it last year have sprung back handily.

Nevertheless, investors have pulled out $790 million out of the Dodge & Cox fund as of mid-year, says Lipper FMI Americas. "People do follow past performance," says Charles Pohl, Dodge & Cox's chief investment officer, who says the fund's recent good renumbers will end up attracting more investments.....

is he right about investor performance or has there been some change ?

Don Rhoades, 43, an insurance agent from Greenwood Village, Colo., also dumped the Dodge & Cox overseas fund portfolio and moved into low-fee exchange-traded funds that track indexes. "Why did I pay so much to lose all that money?" he asks. Although the Dodge & Cox offering charges a not-bad 0.65% in fees, that is still more than Mr. Rhoades pays now.

At the $24 billion Fidelity Magellan, total return has soared this year by 38%. But investors have withdrawn a net $1.5 billion through August.

"We haven't changed our style or anything," says Magellan's manager, Harry Lange. His fund lost 49% last year as bets on tech stocks, among other things, went wrong.

I think he should leave that comment out of the marketing materials given investor fears of another market drop.

The managers console themselves that the current strong performances will bring investors back. "Retail investors tend to be trend followers, and come in after the fact," says Cindy Sweeting, manager of Templeton Growth, up 26% this year after a 43% clobbering in 2008. Investors have withdrawn $1.4 billion this year.

Among the hardest hit since the 2008 crunch has been Legg Mason Value. For 1990 through 2005, it beat the S&P 500 every year. Its manager, Bill Miller, became a financial celebrity and an icon of value investing who cannily snatched up many underappreciated gems.

But in 2008, his heavy holdings in financial stocks like American International Group Inc. and Bear Stearns Cos. produced a 55% loss.

The WSJ recently reported on an article that surely put into question the argument that active managers perform better than indices in down markets. In fact correlations among stocks increase in market selloffs making the purported skills of active managers less important. Although it is true that the correlation among stocks is lower in other types of markets. It does not at all argue for investing with an active manager. And it would not necessarily that the assertion that as the article proclaims "It's a stockpickers market". In fact I think I have never ever heard a single "expert" on CNBC proclaim "it's an indexers market" hmmm...I wonder why.

WSJ on that goldman study. Obviously I agree with the sections I bolded arguing against active funds.


The Return of the Stock Picker’s Market!

A recent research report from Goldman Sachs noted moderating correlation among stocks, calling it a better climate for portfolio managers. “So far, this year is proving to be a much better year for stock-pickers, with 67% of all U.S. equity funds outperforming benchmarks,” Goldman analysts wrote, citing data from S&P.
That’s something for investors to keep in mind, even though there is a long and healthy debate about exactly how much value portfolio managers actually bring to actively managed funds. Still, “if you are one who does believe that they have that ability, this is the time to begin to make allocations towards active management,” Rothman said.

Of course, picking wisely is the trick. Disparate stock performance might free up high quality stocks to rise above the pack. But it also means bad picks are more likely to lag. “You have to be able to pick the right manager,” Rothman said. “And picking the right manager is no easy feat.”

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