The Wall Street Journal
The Intelligent Investor – February 16, 2013
Value Stocks Are Hot – But Most Investors Will Burn Out
By Jason Zweig
Lately, value investing has seemed easy. Over the past year, the Russell 1000 Value Index, a yardstick of cheap stocks with sluggish expected earnings, is up 19%, compared with 11% for pricier “growth” stocks and 15% for the full Russell 1000 index of big U.S. stocks.
Over the decade ended Dec. 31, value funds specializing in large stocks returned an average of 6.7% annually. But the typical investor in those funds earned just 5.5% annually, according to Russel Kinnel, director of fund research at Morningstar.
That is partly because many investors bailed out after these funds lost an average of nearly 37% in 2008; the subsequent rebound was captured only by those who stuck around.
Comments February 16, 2013
Academics and investors alike are quick to critique mutual funds. When comparing mutual funds to benchmarks they focus on one of the most efficient segments of the marketplace, U.S. large company stocks (as represented by the S&P 500 index). They cite how 80% of mutual funds cannot outperform the index. They further cite how mutual funds that outperform the index cannot do so on a consistent basis. Their conclusions are quite convenient. Now, let’s look at the inconvenient truth.
Baird’s Advisory Services Research published a study based 1,500 mutual funds with a 10-year track record as of December 31, 2010. They narrowed the study to 600 mutual funds that outperformed their respective benchmarks by 1% or more on an annualized basis, over the 10-year period. They further narrowed the study to 370 mutual funds that outperformed and exhibited less volatility than the market benchmark.
Those top performing mutual funds generated over $10,000 in incremental wealth above the benchmark’s return for every $100,000 invested over the period. The average outperformance was nearly 3% annualized, net of fees, adding $34,000+ in incremental wealth. Yet, approximately 85% of those top managers had at least one three-year period in which they underperformed by 1% or more.
Although past performance is no guarantee of future results, patient investors willing to accept a ‘lack of consistency’ have been richly rewarded by sticking with well managed mutual funds.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.