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Do Managed Funds Outperform?
In a market like this, managed mutual funds, in theory, should
outperform the overall market. So far, that hasn’t happened. Here are
the details.
By managed funds, I mean mutual funds run by an active manager making
the buy and sell decisions as opposed to funds that simply track an
index.
The managers spend their days analyzing and researching stocks.
Moreover, many employ squads of analysts to assist them in that
endeavor. Further, by virtue of the huge trading commissions that they
generate, mutual fund managers are privy to inside information that you
and I will never see.
With all that going for them, managed funds should shine in any market,
but especially now. Unlike index funds, which track a fixed list of
stocks, mutual fund managers can adjust their portfolios for current
conditions, dumping underperformers in favor of stronger stocks. If they
can’t find any worthwhile candidates, they could go to cash.
So, last week, when the market as measured by the S&P 500 Index was down
a disheartening 42% so far this year, I delved into the numbers to
determine whether managed funds had indeed outperformed. The results
were
discouraging.
Large Growth
Since the S&P index tracks mostly large growth
companies (stocks expected to grow earnings faster than inflation), I
started by using Morningstar’s Premium Fund Screener (www.morningstar.com)
to check the returns of funds holding mostly large-cap (largest
companies based on value of shares outstanding) growth stocks with at
least 95% of their portfolio in U.S. companies.
The 155 funds turned up by that screen averaged a 43% loss year-to-date,
more or less even with the market. However, the average return figure
was misleading. Most funds did worse; only 51 funds beat the S&P while
104 funds fell short.
The top fund was Jensen J (JENSX),
which lost 31%. Next best was Monetta Young Investor (MYIFX),
down 33%.
Large Value
Since, in theory, value-priced stocks (stocks considered undervalued)
are supposed to outperform in down markets, I ran the same screen, only
this time listing funds mainly holding value stocks instead of growth
stocks. My value screen turned up 136 funds averaging a 42% return, not
significantly different than the growth fund list. However, looking at
the details, 72 funds beat the S&P 500, while only 64 fell short. So,
you had a slightly better chance of beating the market with value funds
than with growth funds.
Copley (COPLX),
down 18%, significantly outperformed the large-value category. BlackRock
Basic Value Prin Pro A (MDPVX),
down 28%, came next.
Small Growth
Another bit of market wisdom you hear often is that funds focusing on
small stocks do better than other funds. The rationale is that since
small stocks are less well known than large stocks, fund managers’
research can make a bigger difference.
To check that hypothesis, I used Morningstar’s screener to list funds
specializing in small-cap growth stocks.
I found 88 funds that lost 44%, on average, year-to-date. Worse, only 25
funds beat the S&P 500’s 42% loss, while 63 fell short (the Russell 2000
Index, which tracks small-cap stocks, had also dropped 42%
year-to-date).
Hancock Horizon Burkenroad A (HHBUX),
down 32%, and Boston Trust Small Cap (BOSOX),
down 33%, were the best performers.
Small Value
A check of small-cap value funds told the same story. The 41 funds that
my screen listed averaged a 42% loss, even with the market. Only 19
funds beat the S&P 500, and 22 funds fell short.
Touchstone Diversified Small Cap (TCSFX),
down 32%, and Dryden Small Cap Value A (PZVAX),
down 34%, did the best.
Not Rigorous Research
I doubt that academics would consider my testing procedure
rigorous.
I set up my screens to find funds in the Morningstar “Domestic Stock”
category that excludes funds specializing in particular industries such
as technology, healthcare, and the like. It also required portfolios
containing at least 95% U.S. stocks. I used Morningstar’s “Equity Style
Box” to narrow the list to large-cap growth, small-cap value, etc. I
specified “distinct portfolio only” to avoid multiple listings of
different variations of the same fund (e.g. American Growth A and
American Growth B).
Because I was evaluating mutual funds in
general, not "buy" candidates;
I didn’t preclude load funds, funds closed to new investors, or funds
targeting institutional investors.
Since I arbitrarily set my screening requirements, a slight change in
those parameters would have listed different funds. That said, it’s hard
to avoid the conclusion that, so far this year, managed funds have not
managed to outperform this dismal market.
published 11/23/08 |
