With the mother of all bears having mauled most portfolios in 2008, mutual fund companies are scrambling to come up with solutions to alleviate investor fear that nothing has been done to avoid a repeat performance.
American Century believes that their attention to risk control has been paying off:
About one-third of American Century’s 79 funds are in the top quarter of their categories for performance over the past year, according to investment researcher Morningstar Inc. For the past three years, more than one half of its funds were in the top quarter, and one of every four landed in the top 10%.
Last week American Century was named Best Large Mutual Fund Company at the 2009 Lipper Fund Awards. The prize is awarded to the fund firm top in “delivering consistent, risk-adjusted performance, relative to peers.”
That’s nice. They receive an award for “delivering consistent, risk-adjusted performance, relative to peers.” Every mutual fund known to man got slaughtered last year yet performance awards are being given out.
I have touched on this many times. If a mutual fund/ETF outperforms the typical S&P; 500 benchmark, this is a historic event and deserves praise. Never mind that the S&P; 500 lost over 38% in 2008. If a fund loses “only” 35%, they can boast that they have “outperformed” the index.
The fact that an investor in this fund is now sitting on mind boggling losses, which require him to have to gain 50% just to reach the break even point again, does not matter in the perverse world of Wall Street returns.
American Century still had several funds that trailed their benchmarks last year.
The firm’s largest fund, the $4.9 billion large-cap growth fund American Century Ultra Fund, was down 41.7%.
Chang, the CIO, said he was content with Ultra’s performance because the fund uses a momentum strategy, and is designed to do better in good markets and slightly underperform a benchmark in bad ones.
“Ultra is doing exactly what we told investors it would,” Chang said. The fund returned 21.8% in 2007, almost 9% ahead of its average large-growth rival, according to Morningstar.
Another laggard last year was the $814 million American Century International Discovery Fund, which lost 52.2% — almost nine percentage points behind its benchmark. But in 2006 and 2007 the fund returned 31.5% and 24.5%, respectively, and topped its benchmark handily.
Chang added that while American Century stresses risk management, it also expects stock portfolios to be fully invested and not hold cash. I am not sure why anyone would publish this information. The Ultra Fund lost 41.7% in 2008, yet it “is doing exactly what we told investors it would.” This has to be one of the most ignorant and selfish statements so far this year. Take a look at the numbers. Ultra gained 21.8% in 2007 and lost 41.7% in 2008. A $100k investment in this fund would now be worth (at the end of 2008) only $71k, or a 29% loss. It gets better. The Discovery fund lost 52.2% in 2008, but gained 31.5% in 2006 and 24.5% in 2007. On the surface, it seems that you should be ahead with those prior year gains, but you’re not. Your $100k actually shrank to a little over $78K. I am not picking on American Century here; all fund companies will distribute similar information. My point, which I have been hammering on for over 20 years, is this: It does not really matter how much of a return you make during good times, what matters is how much you keep when the markets turn south. In other words, avoiding big losses is far more important than happily salivating over gains. Hopefully, investors will have learned this lesson. When you read stories like the above one above touting risk control, be aware that this has no effect on you as an investor. Mutual fund companies will always function as the ultimate buy-and-hold institutions no matter what wording is used. When the trend heads south again, it will up to you take action in order to avoid a repeat disaster of last year.
[My emphasis]
Comments 7
Ulli,
It is time the buy and hopers get off their lazy butts and make a long term chart of the SP500 as an example with a 200 day simple moving average. Take a look at the major turning points of the SP500 both up and down. You will soon have a great revelation as to why we trend follow instead of buy and hope. Buy and hope is a lazy persons approch and makes them vulnerable to their money manglers whims. I showed a friend a chart that made it clear as to why I got out of the market at the end of 2007 and she said wow I see what you mean and now she is a believer in trend timing.
Trendman
Ulli,
We all have to realize these mutual fund companies are in business for themselves, as long as they have money coming in and they make money it is very obvious that they could care less about the investor. Some day when people wise up and quit sending those vultures their money maybe they will change the way they do business, but I doubt it.
Ulli
In your post, "Buyer Beware Of Risk Control," you highlighted the statement, "It does not really matter how much of a return you make during good times, what matters is how much you keep when the markets turn south." I feel that is an oversimplification, and you may be inadvertently playing the same game as that of American Century management. From 1976 to date, the S&P; 500 has provided a buy-and-hold return of 10%/year. If one is satisfied with a 10%/year return, then the (paper) losses associated with bear markets pale into insignificance. And if one compares the bear market negative with the bull market positive returns, then I submit that maybe just the inverse of your statement is more accurate.
As I recall, American Century is a load fund, no? So the returns for new Class A investors were even worse than stated. Then again, anyone paying load needs a lobotomy.
Ulli,
I agree with Anon. I also believe how much I make in the bull markets is very important to me. What if I made only 10% in a bull market and only lost 11% in a bear market over a 40 year career? I would be sick. Also if one was 40 years old in 1976 and just started saving for retirement with the SP500 index type fund he would be 73 years old and not much to show for it. So I believe it certainly does matter how much one makes during bull markets and is equally important to keep losses at a minium during bear makes. Who are we kidding here? Not me because I am not trend timing to see how little I can lose during bear markets, but just the opposite and that is to make as much as possible as safely as I can during bull markets. Hope this message makes sense to somebody.
Ulli,
My message is based on the excerpt from the original message: “It does not really matter how much of a return you make during good times, what matters is how much you keep when the markets turn south”. My feeling is that this message is only a half truth as it does infact matter how much one makes in bull markets, what if one made a tiny bit in all bull markets and lost a little more than the bull market gains during all bear markets say over a persons working life, yes it does matter to me how much I make during bull markets. I do agree with you that it does matter how much one keeps during bear markets. If that original statement was an end all statement then we all better just put all our money into CDs as one example and just forget about investing.
Uli,
Risk control if left up to the mutual fund manglers is an illusion. Risk is someything that only we the share holder can manage thru trend following.
I went into a major discount broker’s office a couple of days ago to ask if they had any good places to park some money in a fix income area, boy was that a mistake. The rep. brought out a stack of graphs and data about the economy, market, etc.etc. and motor mouthed to his heart’s content about nothing. He made himself sound so intellegent with his elaborate speech. I was sick of it and said goodbye. I don’t trust any broker or fund mangler only the results of their products.