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From The No-Load Fund Investor, 6/15...
Growth Reigns Supreme
The stock market was up in May, while bonds struggled.
The S&P 500 was up about 1% for the month and 2.4% for the first five months of the year, pre-dividends. Including dividends, the index gained about 3.2%. Small-cap stocks gained more in May, with the average small-cap fund in our database gaining 1.6%. Once again, the ‘growth’ style of investing beat ‘value.’ For May, funds of the former style gained an average of 1.8%, doubling the average return of the value funds we cover. This extends a nice run for growth, which is up 13.5% over the past 12 months, vs. 7.6% for value.
On the other hand, international equities paused for breath in May after racing ahead during the first four months of the year. The MSCI EAFE Index of foreign, developed market equities dropped 1%. Most emerging markets fared even worse. Though the Chinese and Indian markets were up, mutual funds and exchange traded funds for the entire emerging market complex fell by 3% or 4%.
Among sectors, healthcare continued to shine brightest, serving as a tailwind for the growth style. The energy sector generated large losses, inhibiting value.
Most types of bonds fell in May and are basically treading water for the year. Possibly as a result, income-oriented stocks have been lagging the broad equity market. (For more on this, see the June issue of The No-Load Fund Investor.)
Best Buys Commentary. We are making no changes this month in our Best Buys models. Though Price Health Sciences (PRHSX) closed to new investors on June 1, we will maintain it in our models at least until the end of the year. Though anchored in funds that emphasize large, attractively valued companies, Best Buys also has some exposure to U.S. small cap and international stocks. While the equity portions as a whole are diversified among various types of stocks, they are shaded toward growth. That is by design for the current economic environment. Because the world economy is generally not very good now, we want to shade Best Buys toward funds that invest in companies that are experiencing long-term growth in demand that is at least somewhat independent from overall economic changes.
For as long as we can remember, the portion of the financial media reporting on mutual funds has supported the idea that managers of actively run funds should ‘eat their own cooking,’ that is, invest personal monies in the funds they manage. The corollary is that investors should avoid funds whose portfolio managers don’t.
Since 2005, the SEC has mandated that mutual fund companies publish the dollar range of how much personal money portfolio managers invest in the funds they manage (None, $1 to $10,000, $10,001 to $50,000, $50,001 to $100,000, $100,001 to $500,000, $500,001 to $1,000,000, or more than $1,000,000). The information is published in those rarely perused, dusty, dry, legalese documents produced by funds which are known as their ‘Statements of Additional Information,’ which by the way are available on Morningstar.com, as well as directly from fund companies.
All of this seems reasonable. A fund manager with faith in his work would want to invest in his own fund. If a manager prospers and suffers along with those of his shareholders, one would think he would try to do the best he possibly can in order to increase his own financial well-being along with that of his fellow shareholders.
However, statistical evidence to support the idea that funds with substantial manager ownership perform better over time has been hard to find. Several financial academic research papers published over the years have shown very little, if any, correlation between fund performance and the presence or absence of personal investing on the part of portfolio managers.
Also, if you think a little more about it, it really isn’t necessarily true that funds with investments by their own managers should perform better than funds without. After all, if your own money’s at risk, your emotions are more likely to cloud your judgment. In fact, one key to success in many endeavors is emotional detachment. Most doctors shouldn’t treat themselves, right? They might lose their objectivity, delude themselves, take fewer or more medicines than they need, etc. Like health, money matters are particularly prone to mismanagement due to emotional reactions. It’s likely that a portfolio manager is going to be more emotional about a fund in which he has invested a lot of his own money than one in which he hasn’t, perhaps leading him to screw up due to psychological biases. It’s also possible that the particularities of his own financial situation could lead him to make decisions that are good for him, but not necessarily for the bulk of his fellow shareholders.
You can read more from our evaluation of managers’ ownership of their own funds in the June issue of The No-Load Fund Investor.
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The No-Load Fund Investor