The average mutual fund investor has trailed the returns of the average mutual fund. Here are some savvy picks for closing that gap, writes Russel Kinnel of Morningstar FundInvestor.
Fund investors have been buying and selling at the wrong times lately.
The latest figures on investor returns confirm it, but it’s no surprise. Large flows from equity funds to bond funds in the past couple of years have meant investors who did make changes were generally going the wrong way.
Sure, huge sums remained in equity funds, and participated fully in the rally that began two years ago. However, the money that did move was mostly selling low and buying high. For pretty much all of 2009 and 2010, bond funds had net inflows, and stock funds had net outflows.
To see what impact these moves had on investors’ wallets, we turn to Morningstar investor returns. Investor returns are calculated by adjusting a fund’s returns to reflect inflows and outflows. We then asset-weight those individual funds’ investor returns to arrive at a figure that tells us how the average investor fared in an asset class. We can then compare those numbers with the average fund, and see which fared better.
In 2010, the average domestic fund earned a return of 18.7%, compared with 16.7% for the average fund investor, making for a 200-basis-point gap. For the trailing three years, that gap was 128 basis points. For the past five years, it was 98 basis points, and for the past 10, it was 47 basis points.
Clearly, strong investor returns require a healthy meeting of savvy investors and skilled risk-averse management. I’ve selected some funds that produced strong results in the past and have the moderate risk profile to have a good chance at further success.
Manning & Napier Pro-Blend Moderate Term (EXBAX) and Conservative Term (EXDAX)
Even the names of these funds are boring. These funds have produced nice steady returns over the years. Manning & Napier is a solid team-run fund company that stays diversified without watering the portfolio down too much.
Vanguard Wellington (VWELX) and Vanguard Wellesley Income (VWINX)
Large-cap value has been to hell and back, and these funds still delivered good results for investors. Sub-advisor Wellington’s conservatism and security selection skills (in stocks and bonds) have given these funds a great risk/reward profile.
The difference between the two funds is that Wellington is mostly stocks, and Wellesley Income is mostly bonds.
Mairs & Power Balanced (MAPOX)
This fund has the stability in management that you get with the funds above, but Mairs & Power is a smaller group and it runs a more focused portfolio.
The fund is managed by Bill Frels and Ronald Kaliebe. They run a low-turnover strategy that emphasizes old-fashioned, high-quality companies like 3M (MMM), Baxter International (BAX), and Wells Fargo (WFC). Yes, many of their holdings are near their base in Minnesota, but that hasn’t hurt performance.
Mutual Quest (TEQIX)
Mutual Series funds are technically equity funds, but they tend to hold a significant slug of cash and bonds. In addition, their emphasis on cheap stocks has made them pretty easy on investors. If you invest through a broker, it’s worth a look.
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