Really bad periods in life can teach you important lessons. When you spend months in traction, for example, you can reflect on why it’s a bad idea to knit your own parachute. Growing up in the 1970s can teach you why no one should dress like that, ever.
Investors have endured a wretched 14 years. The Standard and Poor’s 500 stock index has gained just 61.9% since March 2000, which translates to an average gain of 3.5% a year — and that’s including reinvested dividends. In the meantime, they have endured horrific bear markets, burst bubbles and never-ending commentary on the monthly jobs report.
What can mutual fund investors learn from all this? Quite a lot, actually. One is that some funds will fare much better than others. But the biggest lesson is that a fund’s investment style may have more to do with returns than the manager does.
We’re looking at the past 14 years because that’s the start of the past two bear and bull market cycles. While it’s good to remember that the current bull market started five years ago in March 2009, we should also remember that the tech wreck began 14 years ago, in March 2000. That kidney stone of a market saw the S&P 500 plunge 44.6%. After a middle-of-the-road bull market, the next bear market started in October 2007 and dragged on through March 2009, pulling the index down 56.8%.
Fund investors, who had been taught to stick with stocks in the long term, have discovered that the long term can be quite a long time. Stock returns from March 2000 have yet to beat the returns from the 10-year Treasury note, which have gained an average 3.9% a year since then, according to Lipper, which tracks the funds.
Nevertheless, a few actively managed stock funds stick out:
• Delafield (ticker: DEFIX), a midcap value fund that’s up 523% for the period. Delafield, like all value funds, looks for stocks of beaten-up companies that Wall Street hates and waits for them to return to fair value. The average midcap value fund has gained 310% for the period.
• Managers AMG Yacktman fund (YACKX), a large-cap core fund up 511% for the period. Father and son team Donald and Stephen Yacktman (with an assist from Jason Subotky) are absolute value managers, who use market dips to buy bargains and tend to run up cash when stocks get expensive. Its more concentrated sibling, Yacktman Focus (YAFFX), is up 504%.The average large-cap core fund — one that looks for stocks of growing companies selling at a reasonable price, relative to earnings — is up 97% for the period, vs. 71% for the average fund that tracks the S&P 500.
• Oakmark I fund (OAKMX), up 311% for the period, is another large-cap core fund with a similar approach to Yacktman, although less inclined to build big cash reserves.
• Fidelity Low-Priced Stock (FLPSX), up 445%. The fund’s value approach is to buy underpriced stocks selling for less than $35 per share. Although ranked as a midcap stock fund, some of its low-price holdings include Microsoft and Oracle, both of which have spent a considerable amount of time below $35. The average midcap core fund is up 207% for the period.
• Meridian Growth (MERDX), up 354%, vs. 108% for the average midcap growth fund.
What can we learn from these funds? First, it’s unlikely many investors would have chosen these funds 14 years ago, when red-hot growth funds were all the rage. Yacktman, for example, had $68 million in assets 14 years ago; it has $13.6 billion now. On the eve of the technology meltdown, the largest stock fund was Fidelity Magellan, up 470% the previous 10 years, and weighing in at $100.8 billion in assets. Since then, the fund has gained 35% and shrunk to $14 billion.
Second, managers with long winning streaks are rare, and their tenure can end suddenly. Meridian Growth owes much of its record to Rick Aster, who died in 2012. Managers Chad Meade and Brian Schaub now manage the fund, and have done a fine job. But funds built around a single manager don’t always have as good a succession plan as Meridian did.
Perhaps the most interesting thing about these funds is not the funds themselves, but their investment categories. Academic research has generally pointed to value funds as being better long-term investments than growth funds, which look for companies with red-hot earnings growth.
This has been true in the past two market cycles, even though value funds got run through the wringer during the 2007-2009 bear. (Bank stocks are a frequent playground of value funds, and bank-stock investors got robbed during the bear market.) Nevertheless, large-company value funds averaged a 107% gain the past 14 years, vs. 50% for large-company growth funds.
Typically, smaller companies offer faster growth and better returns. The average midcap core fund gained 207% the past 14 years, nearly double the amount their large-cap brethren did. Midcap value funds gained 310%, vs. 108% for midcap growth funds. Small-cap value? An average 371%.
The downside for those higher returns: more downside. Delafield’s worst 12-month period in the past 14 years was a 46.4% loss, vs. 43.3% for the Vanguard Institutional Index fund.
Past returns are no indication of future performance, as the Securities and Exchange Commission likes to remind us. But, while all bull markets have certain things in common — rising earnings, for example — all bear markets tend to be remarkably different. Nevertheless, funds that scoop up bargains while the rest of the world panics do seem to have an edge in the long run.