From the Wall Street Journal:
Meet the decade's best-performing U.S. diversified stock mutual fund: Ken Heebner's $3.7 billion CGM Focus Fund, which rose more than 18% annually and outpaced its closest rival by more than three percentage points.
Too bad investors weren't around to enjoy much of those gains. The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm Morningstar Inc.
These investor returns, also known as dollar-weighted returns, incorporate the effect of cash flowing in and out of the fund as shareholders buy and sell. Investor returns can be lower than mutual-fund total returns because shareholders often buy a fund after it has had a strong run and sell as it hits bottom.
At the close of a dismal decade for stocks, the CGM Focus results show how even strategies that work well don't always pay off for investors. The fund, a highly concentrated portfolio typically holding fewer than 25 large-company stocks, offers "a really potent investment style, but it's really hard for investors to use well," says Christopher Davis, senior fund analyst at Morningstar.
The gap between CGM Focus's 10-year investor returns and total returns is among the worst of any fund tracked by Morningstar. The fund's hot-and-cold performance likely widened that gap. The fund surged 80% in 2007. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009, though it is up about 11% for the year through Tuesday.
"A huge amount of money came in right when the performance of the fund was at a peak," says Mr. Heebner, the fund's manager since its 1997 launch. "I don't know what to say about that. We don't have any control over what investors do."
Well, I know what to say about that. Most people aren't wired to play the investment game successfully. Those that are head to Wall Street. You and I suffer disproportionately when we lose as opposed to when we win. Hence our tendency to stop the "pain" by taking losses, never to recover them. These tendencies are well known.
Ken Heebner has had great returns for a decade. It doesn't mean he is about to repeat them. The tendency of hot funds to cool off is well known also. His may or may not. He had a so-so 2009.
What I am saying is that for most people diversification among strategies and asset classes likely holds the key to an investor sticking with the program. Every effort should be made to smooth returns. The less bumpy the ride, the less desire to panic at bottoms. How that is done- for you- is up to your advisor. I believe it CAN be done. Sometimes you will lag in bull markets. In bear markets you will make that back and probably then some. Since the bull part of market cycles tend to be twice as long as bear portions it can be uncomfortable at times. It's not for everyone. It takes away some of the thrills. It also takes away a lot of the pain. See your advisor for a full discussion.
“The individual investor does not achieve the same returns from a mutual fund as is indicated by the fund's performance”.
ReplyDeleteMark’s mutual fund scenario was about the impact of fund entry / exit TIMING. Extending the idea to market Indexes, not only is timing a possible performance variance, but the dynamic COMPOSITION as well *IF* you were a believer in the “buy and hold” paradigm and individually bought and statically held the stocks that comprise the index.
Why? Indexes are actively managed: losers are discarded and perceived growth stocks (with rising valuations) are simultaneously added. So specifically with the DJIA - comprised of only 30 stocks - changes to that index can r-e-a-l-l-y have an affect. Much less dramatically so with the S&P500, Russell 2K, etc but the concept still applies.
Note: In the past 20 yrs, 2/3 of DJIA stocks, as selected by WSJ editors, have changed. As the Dallas Fed once stated “the churn on Wall Street can be viewed as the flipside of the churn on Main Street” as old companies recede and newer ones emerge. This may be true, but therefore jeopardizes the use of the Dow as a stable tracking index, but that is a separate discussion….
Examples of this dynamic composition:
Among the discarded DJIA stocks in the past decade are GM, Kodak, Goodyear, International Paper, and Chevron. Goodyear and Chevron (then $50) were dropped during the dot com heyday of Oct 1999, being replaced by the booming MSFT and INTC. Paradoxically, Chevron was added back at $100 in Feb 2008, as energy was fueling a market boom. IMO, smells of “index as marketing tool”.
Specifically, the world’s largest “image processing company”, Kodak, was dropped from the Dow in April 2004 at $80 / share (it was becoming clear by then that they were moving too slowly in the transition to digital photography, but still generating good earnings on the film cash cow). Kodak is currently trades at < $5.
AIG, “the world’s largest insurance company”, was added as the Kodak replacement at an equivalent of $2000 (accounting for a 20:1 reverse-split adjustment that has taken place since then). But AIG was dropped from the DJIA after just 4.5 years, after losing 97% of its value, AND after the $182,000,000,000 TARP bailout. Today AIG trades at about $28. Whoops…bye bye to AIG; say hello to Kraft!
So, just like Fund statements, simplistic statements like “look at the chart: if you’d bought and held the indiv Dow stocks back in the << insert decade here>> you’d have made X% return” are nonsensical without detailed research. Depending on the baseline, some of those original companies would be merged / submerged at this time. You would have to triage the index composition over time to determine the actual return.
Additionally, the fact that a company is added to an index generates its own price momentum.
Net: it’s difficult to personally, consistently “beat the index” as losing stocks in an index can be retroactively removed, but your actual losses, if you owned the corresponding diversified set of stocks, can’t be “removed”.
So I’d agree with Mark’s “Every effort should be made to smooth returns. The less bumpy the ride, the less desire to panic at bottoms” and supplement with “attempt to manage your risk exposure / preserve your principal. Use the packaged performance metrics as informational, not the comparative measure of your individual investing success or failure”.
I’d add “hedging” as well as “diversification” in your approach (Note: a “hedging” strategy does not = a “hedge fund”)
Where I might take an exception is in my confidence to be able to continue to achieve this: post-2008 crash, there is a new political / regulatory volatility in the market rules that wasn't there previously, and makes it harder to plan with quiet confidence.
JMHO
~Sleepless
S said:
ReplyDelete"Where I might take an exception is in my confidence to be able to continue to achieve this: post-2008 crash, there is a new political / regulatory volatility in the market rules that wasn't there previously, and makes it harder to plan with quiet confidence."
Every effort has been made to favor particular outcomes. Short term, this has had a very bullish effect on the markets. The confusion comes from not knowing where the spillover effects take hold, as they must.
I hedge my personal portfolio and was completely hedged and/or in cash throughout both 2007 and 2008. I became more bullish on US equities in June and published a post on 529 planning revealing that. After a 70% rally, I am cautious.
well Mark, I discovered the blog after that 529 post! Brave & brilliant move on your part - congrats on that return.
ReplyDeleteWhile I had done exhaustive due diligence on the "saving/ paying for college" options (not easy - there are about 15-20 of them, if I recall, and it is hard to align them for an apple-to-apples comparison), it was several yrs ago, when the big lump sum approach to jump-starting a 529 account did not have any appeal. I failed to re-assess that opportunity as everyone else was jumping from the ledges - grrrr!
~Sleepless