01/27/2004The trouble with the ephemeral heroes of investment management is that your money becomes ephemeral when they do. Putnam Voyager fund, for instance, was a hero fund in 1999 when it returned an impressive 56 percent. That was better than the S&P 500 index by a whopping 35 percentage points. Unfortunately, the fund then proceeded to lose nearly 17 percent in 2000, 22 percent in 2001 and nearly 27 percent in 2002.
Talk to the surviving Putnam Voyager shareholders today and you'll see lots of gritted teeth.
Which leaves us with a question. Can any funds cut the mustard over a really long period of time? Not those on the top-performer-of-the-moment lists that befoul media reporting. No, I'm talking about the long-distance runners of fund performance.
To find those funds, I started with the Morningstar Principia database. I searched through the surviving domestic equity funds with 20-year track records. When I did this late in 2002 (see URL below), I found 306 such funds. That list, however, included specialized and hybrid funds. To get a better measure of broad domestic stock picking, I eliminated those fund categories. Result: a list of 234 surviving domestic equity funds.
I use the word "surviving" because our friends in the investment/retirement complex are a bit like surgeons -- they like to bury their failures quietly. Many of the domestic equity funds that existed at the end of 1983 suffered the fate of Al Pacino's enemies in "The Godfather." They "sleep with the fishes."
Of the 234 survivors, only 27 beat the S&P 500 index over the period, and only 31 beat the Vanguard 500 index fund. In other words, although some of these funds were the small-cap, mid-cap and growth funds that are supposed to do better than a broad index of large-cap stocks, less than 12 percent actually beat the index. Only 13.2 percent beat what the fund salespeople like to call "merely average," the Vanguard 500 index. An investment of $10,000 in this merely average fund would have grown 12.78 percent a year, compounded. What was it worth at the end 2003? An impressive $110,826. (This assumes it was in a tax-deferred account and all dividends and capital gains were reinvested.)
As always, the odds favor index investing.
OK, but who's at the top of the list? What was the payoff for picking a star manager? Did many investors actually do it?
The top manager was Robert Rodriguez at FPA Capital. If you had invested $10,000 in this front-end load, small-cap value fund 20 years ago, your initial investment would have grown at 16.71 percent a year. That's a stunning 3.73 percent a year of extra annual return. As a result, you'd now have $219,868 -- twice what you'd have in the index fund. For readers who think I write only about index funds, I interviewed Rodriguez for columns in 1992 and 1994, and mentioned his fund in seven other columns between 1992 and 1999.
Unfortunately, few investors benefited from the full 20-year trip. The fund had $41.1 million in assets at the end of 1983, an amount that would have grown to more than $900 million by the end of the 20-year period. Since the fund now has $918 million in assets, only two things could have happened:
What were the other long-distance-runner funds? Check the list below: These 11 funds beat the S&P 500 index by at least 1 percentage point for 20 years.
|List of surviving broad domestic equity funds with 20-year track records, rank ordered by annualized rate of return|
Tot Ret. Annizd. 20 Yrs
Excess over S&P 500
Net Assets $MM
|Weitz Partners Value|
|Dodge & Cox Stock|
|Mairs & Power Growth|
|Davis NY Venture A|
|Smith Barney Aggr Grth A|
|Legg Mason Value Prim|
|Salomon Bros MdCp O|
|Source: Morningstar Principia, Dec. 31, 2003, data
Dodge and Cox Stock fund, frequently mentioned in this column, the third-ranking fund on the list and the second largest in assets under management, closed for new investors on Jan. 16. On its Web site (www.dodgeandcox.com), the fund company cites a need to slow the flow of new money to invest.
Will these funds continue their outstanding performance?
The odds suggest not, but hope springs eternal.
ON THE WEB
(Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: email@example.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.)