Measure fund's performance during market cycles
— -- Mutual fund performance depends on many things: the number of stocks in the fund's portfolio, for example, the fees that the fund charges and the manager's drinking habits.
A fund's performance shouldn't depend too heavily on the rotation of the Earth around the sun, however, unless the planet strays into some alien's shipping lane. But that's precisely how we measure performance: How did my fund do this year? Last year? The past 10 years?
It's much more useful to measure a fund by how it has performed during market cycles. Ideally, you'd like a fund that fares better than its peers in both bull and bear markets. We've had two bull and two bear cycles in the past decade, and a few funds have done exceptionally well in good times and bad. Although we never know what the next market will be like, these all-weather funds are worth a look.
The Standard & Poor's 500-stock index fell 19% from July 17, 1998, through Aug. 31, 1998 — just shy of the classic 20% decline required for an official bear market, but close enough for our purposes. So we're going to start the first bull market for this exercise on Aug. 31, 1998.
The S&P 500 soared 60% from August 1998 through its peak in March 2000, then swooned for a 49% loss in the ensuing bear market, the worst since the Great Depression. From October 2002 to its next peak, in October 2007, the S&P 500 leaped 101%. As of Thursday, the S&P has fallen 18.5%.
The funds with the best 10-year records are in the chart. We should give honorable mention to Bridgeway Aggressive Investors I BRAGX, which is currently closed to new investors. The fund has soared 399% the past 10 years. A similar fund, Bridgeway Aggressive Investors II BRAIX is still open for new investors.
Lipper, the mutual fund trackers, classifies Bridgeway Aggressive Investors and Quaker Strategic Growth QUAGX as multicap funds, which means they can invest in the stocks of any size company. At least at the moment, those funds are invested primarily in large-company stocks. Both funds, however, dipped fairly deeply into small and midcap stocks in the early part of this decade.
Among conservative funds, Gabelli Equity-Income GABEXhas gained 106% the past 10 years. It slid just 7.9% in the 2000-02 bear market. Like many Gabelli funds, it's not cheap: The fund charges 1.43% a year in expenses. On the other hand, it's pretty tough to argue with its results.
Other funds worth a look:
•Large-company growth. Janus Advisor Forty JDCAX beat its peers the past decade — and in bull and bear cycles — but it was still a ragged ride. Growth funds look for stocks of companies with soaring earnings. The average large-cap growth fund fell 53% in the 2000-01 bear market, and Janus Advisor Forty fell 51%. The fund has gained 110% the past decade, however, thanks to big gains in bull markets.
•Large-company value. Value funds look for stocks of beaten-up, misunderstood companies, in the hope that they will eventually return to Wall Street's favor. Broker-sold MFS Value MEIAX fell just 3% during the 2000-02 bear market. Like most value funds, it has suffered more during the most recent downturn: The fund has fallen 12% since October 2007, vs. 17% for the average large-cap value fund.
•Large-company core. Core funds are an amalgam of growth and value: They're often called GAARP funds, for "growth at a reasonable price." Broker-sold Victory Diversified Stock A SRVEX has gained 103% the past 10 years; its manager has been at the helm nearly 20 years. For no-load fans, TCW Equities I TGLVX has gained 80% the past decade, and offers a low 0.76% expense ratio, too.
Small and midcap stocks often follow a different cycle than large-company stocks, and they held up far better in the 2000-02 bear market than large-company stocks did. One small-company core fund not in the chart deserves mention, however: Royce Low-Priced Stock RYLPX, looks for stocks selling for less than $25 a share — not quite the same as a small-company stock, as General Motors shareholders could tell you. Royce Low-Priced Stock has fallen just 5.3% in the most recent downturn.
At least during the Earth's most recent rotation around the sun, fund performance has been fairly rotten. But if you look at market cycles — instead of solar ones — you might have a better chance of choosing a winning fund.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.