The ultimate investment goal for the majority of investors is to find some no load funds/ETFs that have the ability to zag when the markets zig.
This is a daunting task indeed and many, who thought they had such portfolio diversification last year, learned the hard way that this proverbial needle in the haystack had not been found yet.
The WSJ had some thoughts on the topic in “When The Market Zigs, These Funds Zag:”
Last fall, many investors found out that they weren’t as diversified as they had thought. Mid-cap blend, large-cap growth, international value: Their mutual funds had fancy names and labels, but when the crunch came, all those funds were caught doing the same thing, betting shares would rise.
It makes sense to look at funds that can mix it up, too. That’s why some investors are looking toward the growing number of “absolute return” funds on the market.
Absolute return funds are designed to ignore stock market indices and benchmarks, instead producing steady gains in any environment. Such funds can vary widely. The classic type moves money across multiple assets, from stocks to cash to bonds to currencies, and bets on shares’ fall as well as their rise.
These new funds are long on promises, but it’s hard to find an absolute return fund with a track record you can judge. MFS Diversified Target Return has only been around for about 18 months. Goldman Sachs launched its Absolute Return Tracker Fund last year. Putnam’s four new funds — Absolute Return 100, 300, 500 and 700 — were only launched in January.
One that’s been around for longer: Federated Market Opportunity (FMAAX). Since its debut at the end of 2000, it has gained about 60% — compared to 30% for world stock markets overall, and essentially zero for Wall Street. The fund actually gained through 2001 and 2002. And in the 12 months ending April 30, it lost a modest 4.8% — far ahead of the typical “flexible portfolio” fund (which lost 27%) or the Standard & Poor’s 500 (which lost 35%). The typical “market neutral” mutual fund lost 6.4%, according to fund-analysis company Lipper, Inc.
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The fund turned broadly neutral by the end of September, and mildly bullish in October. Shares continued to plunge. From highs to lows last year, the fund still fell by about a third. Yet overall the performance stacked up well compared to the typical mutual fund — especially in the biggest market meltdown in four generations.
So what does Mr. Lehman see now? “We’re net short,” he says. “We have said for some time that the market lows are still ahead of us.” Yikes. He thinks this is a bear market rally, with no more than 10% or so left to rise. The fund is now betting heavily against stocks that depend on the indebted consumer, such as retailers and restaurant companies.
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Investors, of course, know there that there is no free lunch. Absolute return funds will outperform others in a bear market, but they will underperform when shares boom. They tend to have high expenses. Federated Market Opportunity’s A shares have a 5.5% sales load and a total expense ratio of 1.56 %. Plus, such funds are only as good as their managers.
Obviously, those investors who had FMAAX as part of their holdings did fare better than the rest of the asset allocation crowd. While I don’t own FMAAX, or any of the funds discussed in this article, I have used it in the past since it is available to me as a load waived fund.
With a Beta value of 0.43, it will hold up better than most in bear markets but lag in rip-roaring bull markets. Still, it’s not a fund for all seasons that can be blindly held. Applying a trend tracking strategy including stop loss points would have improved results considerably.
Buying and holding this fund still exposed you to a 24% drop last year, however, it has recovered nicely closing last week at 11.73, which is only a little over 7% off the price it had when our Sell signal was generated on 6/23/2008.
The bottom line is that there is no such one fund/ETF for all seasons, so the search for the needle in the haystack goes on.
Comments 2
The Permenant Portfolio Fund (PRPFX)holds gold mining companies, oil drillers, Swiss franks, and international bonds, mostly Swiss bonds, though not necessarily in that order. Don’t quote me on the exact holdings, as they do vary, but it is basically gold and bonds and some oil and the occasional growth stock. It is not a perfect zig to the markets zag, but one look at a chart shows it to be the closest thing that I would ever call “buy and hold”.
PRPFX is an excellent fund for the long haul. The fund manager has an excellent long-term track record.