Look at how a fund performs in good and bad times

Pretty soon, you'll be reading about your mutual fund's first-quarter performance and, like most of us, sobbing uncontrollably.

But there's nothing sacred about a fund's three-month performance — or three-year performance, for that matter. The stock market's cycles don't depend on the Earth's rotation around the sun, and your fund's performance doesn't, either. You should judge your fund's merits by its performance in up and down cycles. Fortunately, we have a good opportunity to do just that.

Let's be optimistic and say that the Standard & Poor's 500-stock index hit its bear market bottom on March 9. If that's the case, we have a stock market cycle. The bull market started on Oct. 9, 2002, and ended Oct. 9, 2007. Let's hope the market's March 9, 2009, low was the end of the bear market.

Ideally, you want a fund that will gain more than its peers in a bull market, and lose less than similar funds in a bear market. To find the best funds, we added two other requirements:

•Continuous management. The fund had to have at least one manager at the helm for the whole period. A fund's record doesn't mean as much if several skippers have been at the helm.

•Large assets. Nothing against small funds, but we wanted to look at funds that people were likely to have in their portfolio — and particularly in their 401(k) retirement plan portfolio. We looked only at funds with $1 billion in assets or more.

At first, the returns from the best performers don't seem terribly impressive. T. Rowe Price New Horizons gained 29.9% for the full cycle, which translates into an average annual gain of 4.2% from 2002 to 2007, according to Lipper, which tracks the funds.

But as market cycles go, the most recent one was a distinct disappointment. The Russell 2000 small-company stock index, for example, gained just 13.9% over the entire period. That's an average annual gain of 2.0% for the period. Other indexes fared worse: The S&P 500 lost 1.3% during the entire market cycle, including reinvested dividends.

Such wretched returns make the Eaton Vance Dividend Builder fund's evtmx 67% gain seem heroic. To be fair, the fund was a utilities fund until August 2007, when it diversified into a broad-based large-company fund. "Utilities stocks had been outperforming for five years, and values weren't as compelling," manager Judy Saryan says. "We decided to use our expertise in dividend stocks to broaden the fund's universe." A few other standouts:

•Vanguard Capital Opportunity, which looks for companies with bright growth prospects and blighted prices. The fund, up 57% for the full cycle, has beaten its peers in Lipper's multicap core category, meaning it looks for stocks of growing companies selling at a reasonable price. Unlike other core categories, however, it can invest in small, midcap or large companies.

The fund, unfortunately, is closed to new investors. You can, however, invest in the Primecap Odyssey Stock fund poskx, which is run by the same team.

•Sound Shore sshfx, a multicap value fund, holds about 40 stocks in its portfolio, all selected for low prices, relative to earnings, as well as growth potential. Management has significant holdings in the fund, which means that they really do feel your pain. It's up 18% for the cycle.

Page
  • 1
  • |
  • 2
Join the Discussion
blog comments powered by Disqus
 
You Might Also Like...