| Summary: There are still some mutual funds that | | | | an outperformer that disregards style boxes. |
| outperform, and you can grow wealthier by using | | | | How can you profit by this? Look for these |
| them instead of index funds. You just need to | | | | characteristics: |
| know what to look for. | | | | DO NOT USE massive, bloated funds. If a |
| You have heard here in the past, and from most | | | | manager outperforms frequently, and their fund |
| of my counterparts, that index funds and ETFs | | | | increases in size from a few hundred million to |
| are the way to go, and to do otherwise is a fool's | | | | 10+ billion dollars, the fund is much less likely to |
| errand. Index funds have lower costs, and will | | | | outperform (i.e. Fidelity Contrafund). The smaller |
| beat the majority of mutual funds over time. | | | | the fund, the better. |
| There are myriad reasons why most mutual | | | | Look for funds that are not "closet indexers." If it |
| funds underperform. The fact is, mutual fund | | | | performs like the benchmark index every year, |
| companies are primarily asset gatherers. They do | | | | disregard. |
| not benefit from outperformance, unless it gains | | | | Find funds with a history of outperformance. The |
| them assets. They only get revenues from | | | | best managers, regardless of style, outperform |
| assets under management, not their performance. | | | | over longer timeframes. |
| Investors being the herding animals that they are, | | | | Select managers that are not concerned with |
| if a fund outperforms most years and then has a | | | | fitting a particular style box and invest based on a |
| bad year, money will pour out of the fund like a | | | | theme, such as future inflation. |
| leaky bucket. The CEO, being a good businessman | | | | Do you want an example? Hussman Strategic |
| (or woman), will recognize that the most | | | | Growth picks quality stocks that the manager |
| profitable way is to try and immunize the fund | | | | (Hussman) believes will outperform. Then he |
| from underperformance. The solution is to make | | | | hedges the portfolio (incrementally removing the |
| sure that your fund keeps up with your | | | | stock market risk) based on his views of how |
| competitors. For example, if the rival funds are | | | | cheap or expensive the stock market is at the |
| piling into energy stocks, you had better have the | | | | moment. If stocks are cheap (based on historical |
| same exposure, or risk being left out. In the end, | | | | average valuation) and the market has positive |
| funds mimic each other so that they don't risk | | | | momentum, there will be little or no hedges on |
| losing clients. | | | | the portfolio. If stocks are expensive and the |
| Also, financial advisors are more concerned with | | | | recent market action is poor, the portfolio will be |
| keeping their clients in the correct Morningstar | | | | fully hedged. |
| style box for diversification than in creating the | | | | Another example is CGM Focus by Ken Heebner |
| highest possible terminal wealth. That is why the | | | | (underperformed in this bear market, but overall a |
| best managers that go anywhere for returns are | | | | good fund) that doesn't correlate highly to the |
| penalized by Advisor Joe, CFP who is only | | | | stock market. |
| concerned with whether a fund can be labelled | | | | Just remember, if you want a solid portfolio |
| large value or large growth. Advisor Joe would | | | | without much effort, just use indexes and forget |
| much rather put you in a bloated, | | | | about it. But if are willing to put forth the effort, |
| underperforming fund with a static mandate than | | | | there are opportunities in mutual funds. |