Fund Winners and Losers in 2004
Who's up? Who's down? And should you care?
Fund Spy
As an observer of the fund industry, I've always been skeptical about the prospects for funds that are actively managed in name only. Such funds--and there are many of them--typically charge too much for what little they do, which is primarily focus on not messing up. That's hardly a recipe for success.
Yet, there are plenty of truly active funds with reasonable fees that investors can choose from. The risk with these funds is that their managers typically make bets that don't immediately play out as expected. If a fund has established a long pattern of success, shareholders ought to look past relatively brief periods of underperformance, even if such difficulties last for more than a year or two. For instance, there is certainly no reason to lose faith in Legg Mason Value (LMVTX), even though it is underperfoming in 2004. After all, I can't think of a topnotch active manager who hasn't underperformed at some time or another.
By the same token, however, some underperforming funds may warrant closer evaluation. For that reason, I polled Morningstar's analysts earlier this week to see what they thought the biggest performance surprises of the year were, and whether shareholders should care or not.
In the positive column are several of the most conservative small- to mid-cap funds, including Ariel (ARGFX), Third Avenue Small-Cap Value (TASCX), T. Rowe Price Small Cap Value (PRSVX), and the Perkins-managed Janus Mid Cap Value (JMCVX). All but the T. Rowe fund have double-digit cash stakes, making their strong performances particularly surprising. These funds' continued strength is the latest chapter in an extended small- to mid-cap rally that may be getting long in the tooth. As such, rebalancing and toning down future expectations would only be consistent with the defensiveness currently exhibited by these funds' cash stakes.
On the flip side, many bond funds have been hurt because interest rates haven't risen as rapidly as expected. That's held back funds such as FPA New Income (FPNIX) and Dodge & Cox Income (DODIX), as well as offerings such as Rydex Juno (RYJUX), which shorts the 30-year U.S. Treasury Bond. Meanwhile, offerings such as MFS Bond (MFBFX), which don't bet on the direction of rates, have thrived. Of course, funds that have adopted a conservative posture may yet be vindicated depending on where rates go from here.
Back on the positive side, two sector funds that have stood out are PIMCO RCM Biotechnology and PIMCO RCM Global Technology . They have churned out positive returns in tough sectors, pointing to the value of active management and good stock-picking. And while investors may not be too familiar with those funds, they won't be surprised to note how well the two Primecap-managed funds, Vanguard Primecap (VPMCX) and Vanguard Capital Opportunity (VHCOX), have done despite owning a passel of biotech and semiconductor stocks. Meanwhile, among other high-profile funds that favor those sectors, it's interesting to note that Janus Twenty is bouncing back. The fund's assets have slipped to a manageable level, and it remains closed--which is a good thing for investors.
Among high-profile funds that are disappointing, one can't look past Fidelity Magellan (FMAGX). While the market has been cool to mega-caps in general, my colleague Christine Benz thinks the stock-picking itself deserves some of the blame. As she noted in a recent Analyst Report, investors should expect more from this fund given the resources Fidelity puts behind it and large-cap research in general. We've also been surprised by how badly Smith Barney Large Cap Growth (SBLGX) has done this year, although our expectation is that the fund is just experiencing a hiccup.
Finally, on the international side, investors shouldn't worry about Longleaf Partners International's (LLINX) underperformance. The fund has such an unusual and original portfolio that it's bound to be out of step at times. The same holds true for Masters' Select International (MSILX), which has an extremely compact portfolio. We expect that these two will be fine over the long haul, even if this isn't a year to remember.
It's Tax TimeIt's that time of year again. With most fund companies getting ready to make distributions, make sure you look to see if a fund you're purchasing for a taxable account may have one coming. Here are some of the ones we know of already: