When I published my last Model Portfolios at the start of the year,
at least several investors commented that my recommended allocation
to stocks of 52.5% for Moderate Risk investors seemed inappropriately
Another investor commented in February that the stock market
seemed to be "ignoring" my somewhat "pessimistic" outlook for stocks
over the next year or more. I had to point out that one month's results, that is,
February's, did not offer a long-term view of things to come. In fact, Feb. only
barely "neutralized" a very poor Jan.
And March hasn't exactly been the
kind of month that should inspire the bulls either. In total, the
first three months of 2014, although hardly conclusive themselves,
aren't pointing to much different than the low single digit
gains for the entire year that we suggested possible in the Feb. Newsletter.
It is important to re-emphasize that I wasn't predicting that stocks
would do badly this year. Rather, I was only stating that, according to
historical data, the odds did not seem to favor good returns.
In fact, as I pointed out to one person who seemed to be labeling
me as almost a market bear, that my recommended allocation of 70% to
stocks for investors who consider themselves as aggressive would hardly
be the stance of a person with an overall bearish view.
So the question of a recommended allocation to stocks right now is a tough
call to make. (But has it ever been an easy call?). The key for me is not to try to
read any tea leaves and predict where stocks will be within a matter
of months, or even over the
Model Portfolio Changes Beginning April, 2014, continued
on page 6
Investors Tend to Choose Funds That Lag the Markets
By Tom Madell
In this article, I will show that the funds and ETFs most frequently chosen by investors do not, on average,
have a particularly good long-term track record as compared to randomly chosen funds. In fact, over the last
five years, investors
could have achieved better returns instead by using a rather surprisingly simple method.
This method will be described shortly.
If we roughly define those funds with the most investor
assets as those most chosen by investors, we can then examine how well these choices have done down the road. Conveniently,
every month, a list of the funds with the most
investor assets is published in the Wall Street Journal. You can also find similar lists elsewhere online.
Let's look at the biggest stock and bond mutual funds and ETFs that investors were choosing five years ago.
While not all investors will hold their chosen funds for that long, I found quite similar results to those discussed
here when looking at
investors' choices made just one year ago.
Stock Mutual Funds
Just over five years ago, investors had the most money in the following 25 stock mutual funds below, listed in order of
assets under management (funds that are stock/bond combinations were excluded; ETFs are covered separately below).
The table also shows how well each fund performed over the following five years. As you scan the table,
keep in mind that over the same period, the S&P 500 index with dividends reinvested, returned 23.00% (annualized) while the
average return of all domestic diversified funds as reported in the Wall Street Journal was 22.30%.
continued on page 2
(Investors Tend to Choose Funds That Lag the Markets,
continued from page 1)
Stock Mutual Funds with Most Assets, Mar. 2009
Stock Mutual Funds with Most Assets, Mar. 2009 (cont.)
American Funds Growth Fund of Amer A
Dodge & Cox International Stock
Fidelity Growth Company
American Funds Capital World G/I A
Vanguard 500 Index Admiral
American Funds Invmt Co of Amer A
Vanguard Total Stock Mkt Idx Adm
Vanguard Total Stock Mkt Idx Inv
Vanguard 500 Index Inv
Fidelity Low-Priced Stock
American Funds Washington Mutual A
Vanguard Institutional Index Instl Pl
American Funds EuroPacific Gr A
Vanguard Windsor II Inv
Vanguard Institutional Index I
Vanguard Total Intl Stock Index Inv
Dodge & Cox Stock
Davis NY Venture A
American Funds New Perspective A
American Funds Growth Fund of Amer F1
Fidelity Diversified International
American Funds Fundamental Invs A
Funds in tables with an "*" aim to match the S&P 500 or an index of the total US stock market; all data thru 2-28.
Only six out of the 25 funds, highlighted in green, or 24%, that investors most chose 5 years ago
wound up beating the S&P 500
on a long-term basis, with 76% trailing the index. Of those six, 3 were
index funds constructed to closely resemble the index or an index of the total US stock market. And 5 out of these
six were either Vanguard or Fidelity funds.
The remaining funds were nearly all managed funds that tended to trail the index
by up to several percentage points, many of them American Funds that charge a hefty load.
The average performance for the 25 funds was 22.16%, slightly trailing the performance
for all US diversified funds. In other words, the masses of investors' money, at least in terms of the most popular
funds in early 2009, did no better (and actually, a tad worse) than the average fund which investors could hit upon
by randomly selecting from the pool of all available US stock mutual funds.
True, many investors will not likely lament the above outsized returns of the last 5 years even if they
did fall short of the
more than 23% annualized returns achieved by the six funds shown that excelled. However,
trailing the index by 1 or 2 or more percent per year can amount to a significant amount
of money year after year. And if returns over the coming years fall back to something closer to, say, 8-10% per year, such a
deficit would represent a significant percentage of one's overall return.
You might think that investors who chose ETFs 5 years ago would have made more savvy choices than those
who picked mutual funds.
After all, many knowledgeable investors argue that ETFs, rather than mutual funds, are better choices for investors.
The following table shows the 25 ETFs investors had the most money in five years ago, listed in order of
assets under management. The table also shows how well each fund's market price performed over the following five years.
keep in mind the 23.00% annualized return for the S&P 500 and 22.30% for the average mutual fund over the same period.
Stock ETFs with Most Assets, Mar. 2009
Stock ETFs with Most Assets, Mar. 2009 (cont.)
SPDR S&P 500
SPDR S&P MidCap 400
SPDR Gold Shares
iShares S&P 500 Growth
iShares MSCI EAFE
iShares MSCI Brazil Capped
iShares MSCI Emerging Markets
Market Vectors Gold Miners
iShares Core S&P 500
Energy Select Sector SPDR
Financial Select Sector SPDR
iShares Russell 1000 Growth
iShares MSCI Japan
Vanguard Total Stock Market
iShares Russell 1000
iShares Russell 2000
iShares Core S&P Mid-Cap
SPDR Dow Jones Industrial Average
iShares Silver Trust
iShares Russell 1000 Value
iShares Russell Mid-Cap
iShares China Large-Cap
ProShares Ultra S&P500
Vanguard Emerging Markets Stock Idx
For the most popular ETFs of five years ago, 60% of the most chosen wound up trailing the S&P 500, while 40% were ahead.
While this 40% exceeded the 24% for mutual funds, you can see that, overall, these ETFs' performance results tended to
be more variable than the above 25 stock mutual funds. In fact, as a group, the average performance for the most popular
ETFs was 19.86%, trailing the average for the popular mutual funds by 2.40%.
Clearly, investors on average in the biggest ETFs five years ago who held their investments through this half decade of
a super bull market would have had a more mixed record of excelling and
would have done more poorly than the mutual fund investors in relative terms. And although only a scant few of these investors
could complain about their absolute performance, it might be surprising that the most popular ETFs of five years ago
did not prove to be a more winning place to be for either savvy or ordinary investors who began flocking to
these investment products in recent years while, at the same time, pulling back from mutual funds.
In all honesty, likely there was nothing wrong per se with these ETFs. Rather, by directing
their choices at times to more narrow corners of the stock market, such as precious metals and more volatile
foreign markets, some ETF investors wound up choosing areas that turned out not "the best places to be"
over a significant period of time.
Bond Mutual Funds
Likewise, 5 years ago, investors had the most money in the bond mutual funds shown below listed in order of
assets under management. In evaluating these funds' performances over the next 5 years,
keep in mind that the average taxable bond fund returned 7.78% annualized through 2-28-14,
as reported in the Wall Street Journal.
Bond Mutual Funds with Most Assets, Mar. 2009
Bond Mutual Funds with Most Assets, Mar. 2009 (cont.)
PIMCO Total Return Instl
Vanguard Inflation-Protected Secs Inv
PIMCO Total Return Admin
Vanguard Sh-Term Investment-Grade Adm
American Funds Bond Fund of Amer A
Fidelity Investment Grade Bond
PIMCO Total Return A
Fidelity Total Bond
Vanguard Total Bond Market Index Inv
PIMCO Total Return D
Vanguard GNMA Adm
Vanguard Total Bond Market Index Signal
Vanguard GNMA Inv
Loomis Sayles Bond Instl
Dodge & Cox Income
PIMCO Low Duration Instl
Vanguard Total Bond Market Index Adm
American Funds American Hi Inc Tr A
Vanguard Total Bond Market II Idx Inv
T. Rowe Price New Income
Vanguard Total Bond Market Index I
Oppenheimer International Bond A
Vanguard Sh-Term Investment-Grade Inv
Western Asset Core Plus Bond I
Fidelity Spartan US Bond Idx Investor
Only 5 out of 25, or 20%, of the most popular mutual funds in terms of invested assets in early 2009
wound up outperforming the average bond fund after 5 years, while
80% trailed. The average annualized performance of these funds over the period was 6.06%. Here, the outperforming
funds were from a variety of fund families, and noticeably, none from Vanguard.
While you might wonder why the average bond fund did so well as compared to many of the funds above and to
the bond benchmark (typically, the AGG ETF shown in the table below),
the reason appears
to be that corporate and high yielding bond funds, of which there are many in the universe of bond funds, tended to excel.
On the other hand, many "safety-oriented" investors preferred funds that had a higher proportion invested in
government bonds which, while less risky, tended to underperform over the last 5 years.
The final table shows the 10 bond ETFs where investors had the most money 5 years ago. (Only 10 are listed
since in 2009, even among the "biggest" bond ETFs, many were small as compared to big bond ETFs today.)
Bond ETFs with Most Assets, Mar. 2009
Bond ETFs with Most Assets, Mar. 2009 (cont.)
5 Yr. Tot.
5 Yr. Tot.
iShares TIPS Bond ETF
iShares 7-10 Year Treasury Bond
iShares Core Total US Bond Market
iShares iBoxx $ High Yield Corp.
iShares iBoxx $ Investment Grade C
iShares Short Treasury Bond ETF
iShares 1-3 Year Treasury Bond ETF
iShares 20+ Year Treasury Bond
Vanguard Total Bond Market
Vanguard Short-Term Bond
As with the most popular bond mutual funds, only 20% or 2 out of the 10, outperformed the average bond mutual fund.
The average return for these ETFs was 5.39% annualized which was, once again, less than the returns
for either the most popular bond mutual funds or even the average of all taxable bond mutual funds.
The same reasons as for popular stock ETF underperformance appear to apply for bond ETF investors. Rather than
choosing investments that tended to allow a manager pick a relatively broader swath of bond investments,
ETF investors often chose to invest in a narrower band of bond market segments. Over the subsequent half decade,
the segments chosen by the ETF investors, while perhaps appealing at the time, once again did not prove the best places to be.
In many cases, good bond fund managers (vs. narrower indexes) were able to guide their funds' investments
into more profitable directions as conditions changed.
Why Do So Many Investors Wind Up in Market-Lagging Funds?
Many of the most popular funds chosen by investors are from a slate of offerings from the
largest fund providers which include, at the top of the list, Fidelity, Vanguard, and American Funds.
And Fidelity and Vanguard are among the biggest providers of 401(k)s which
therefore include a number of their own funds in the list of funds available within the ensemble.
Meanwhile, American Funds are distributed widely by investment advisors and brokers.
But beyond high availability and visibility, many investors perhaps choose these mainstream funds because they
have more confidence in well-known funds that in the past have had pretty good track records.
But, as shown by the data above, the most popular funds often do not wind up being better choices, and often worse
choices, than perhaps those that could have been
chosen merely by throwing darts at a listing all funds.
At the start of this article, I suggested a surprisingly simple method of selecting funds that had a better
chance of beating the average fund, or better yet, even the market indexes. This method is suggested by using
the same kind of data analysis as is provided above. That is, from a pool of potential selections, we looked at
those which would have beaten the average fund, and even the stock and bond benchmarks as well.
As you likely are aware, both Vanguard, Fidelity, and a few other investment companies are known as providing a very good overall
slate of funds. But here, let's just focus on these two fund giants; if interested,
you can check out the comparative performance of other fund company slates on your own.
Starting with Vanguard, if you look at Vanguard's total lineup of stock funds you will
see a much larger percentage of these funds beat the S&P 500 index or the average fund than the data shown above.
In fact, 29 out of 48 Vanguard stock funds that have existed for the entire 5 years returned greater than 23% annualized
over the last 5 years - or 60% (This includes "Investor" share class shares only to avoid repetition with
additional share classes.)
Likewise, if you look at Fidelity's much bigger lineup of stock funds, you will see that out of 115 funds listed on
their website with 5 year
track records, 65 beat the index, or almost 57% (excludes commodity, alternative fund categories, and a myriad
of Fidelity additional share classes).
For stock ETFs, Vanguard had 19 out of 33, or about 58%, which beat the index. (Note though
that Fidelity only has 10 ETFs of its own and none have a 5 year track record yet;
they instead offer hundreds of iShares ETFs.)
With bonds, the story may not be quite as clear. Vanguard had 4 out of 14 bond funds (excluding munis) or 29% beating the
return of the average fund shown above, vs. the 20% for the most popular funds that were chosen by
investors. Fidelity had 7 out of 25 funds, or 28%, with 5 year records beating the average fund.
Given these more favorable odds of success, if you have access to these Vanguard or Fidelity funds as
listed on their respective websites,
it might make more sense to pick almost any fund from these slates rather just the best known funds,
or other well-known funds from other fund companies. Of course,
one should always exercise care in selecting one's specific choices.
But what if investors are locked into qualified plans such as 401(k)s that do not offer choices from
these two best known fund families?
With stocks, perhaps most should invest in funds that mirror S&P index itself, or a fund that invests in the total U.S.
market rather than
attempting to pick from less diversified offerings that are often found in funds that focus on certain types
of assets, sectors, or in many specialized ETFs.
With bonds, perhaps they should search for managed funds that allow the manager to select and occasionally
reshuffle which areas of the
bond market to keep the most assets in, rather than for funds that prescribe a relatively fixed investment position.
Finally, perhaps they should be sure to do some research
to see which managed funds have outperforming track records over the last 5 years (or better still, even more),
preferably achieved by the same on-going manager.
How Did This Newsletter's Picks Do Over the Last Five Years?
To be fair, I subjected my Newsletter's picks from approximately the same period five years ago to a
similar analysis. But it must be remembered that we change our picks several times each year and
do not assume that, under most circumstances, the best returns will result from merely buying and
holding a portfolio, as the above data illustrates. (Note: A more complete re-cap of prior recommendation
performance will be published on this site some time in early April. Please check back then.)
At the beginning of the 2nd quarter in 2009, we recommended 6 stock funds, 5 of which were from Vanguard. Four of these 5
Vanguard funds beat their benchmarks, or in the case of the Vanguard 500 Index Fund, nearly equalled the 23% index return
cited above for the same period.
The 6th recommended fund, which we recommended for 10% of a stock portfolio, turned out to the near perfect candidate
for the TV show "The Biggest Loser." More on this fund in a minute.
The five Vanguard funds along with their subsequent 5 year annualized returns (through 2-28) are shown here:
-Vanguard Growth Idx (VIGRX) 23.73%
-Vanguard 500 Idx (VFINX) 22.85
-Vanguard Small Cap Growth Index (VISGX) 29.87
-Vanguard Small Cap Index (NAESX) 29.01
-Vanguard Internat. Gr. (VWIGX) 20.26 (Note: Appropriate benchmark would be an international index
which returned 17.34.)
-Hussman Strategic Growth (HSGFX) -3.85
The last fund was Hussman Strategic Growth (HSGFX). Why did we pick this fund? At the time, stocks had just
suffered through a wrenching bear market and HSGFX was one of the few funds around that was significantly outperforming
the S&P 500 over the prior 5 years. But its investment strategies were particularly geared toward doing well in an underperforming market.
As the market turned positive, the fund was destined to severely underperform. By Jan. 2010, we had completely removed
the fund from our Model Portfolio.
Even with the assumed inclusion of this fund for the full five years,
our equal weighted average annualized return for the 6 recommended stock
funds was 20.3% annualized. And had one invested in
these 6 stock funds in the specific percentage allocations we recommended, the return would have also been 20.3%.
The following five funds were recommended beginning in April 2009 along with their subsequent 5 year returns:
-Vang. GNMA (VFIIX) 4.35%
-PIMCO Total Return (PTTRX) 7.36
-Vanguard Long Term Treasury (VUSTX) 5.62
-Vanguard Inflation Protected (VIPSX) 5.98
-Amer. Century Intl Bond (BEGBX) 4.45
Clearly, we, as investors described above also did, focused too heavily on funds with government as opposed to
corporate bonds. So, none of our picks beat the return of the average bond fund and the average annualized equal weighted
performance of all 5 funds was 5.55%, slightly better than the 10 most popular bond ETFs but slightly
worse than the 25 most popular bond funds mentioned above. And the funds weighted as we recommended returned 5.29%.
Since we do change our picks on occasion, we
gradually moved toward including more outright corporate and high yield bond funds in our Model Bond Portfolio. We
typically invest our biggest bond allocation to PIMCO Total Return, a fund which allows
the manager to decide which areas of the bond market seem most attractive; frequently, this has been in
End of Investors Tend to Choose Funds That Lag the Markets
Please return to Page 1 if you haven't already read Model Portfolio Changes Beginning April, 2014
(Model Portfolio Changes Beginning April, 2014,
continued from page 1)
next 12 months, but rather, to answer the question:
should investors with a moderately long investment horizon continue to keep a relatively high allocation?
If one rarely changes their allocations, including not usually rebalancing,
then perhaps a high allocation to stocks might be justified. After all,
if you're going to keep your money just where it is for the next 5, 10,
or even more years, stocks will likely be a better place than bonds or cash.
But, if you see yourself as changing your investments on occasion or
even more frequently in response to changing market conditions, then keeping
your allocation somewhat lower than normal seems appropriate to me. While
disclaiming the ability of anyone to predict specific movements of stocks,
it seems like there are much better odds that the market will meander or
even underperform until there has been a significant correction.
I can't prove this, so we'll just have to wait and see. But by having taken some money
off the table in the past few months, and perhaps a little more right now, I think
that better buying (or even just holding) opportunities will appear after
what could easily be a 10 to 20% correction, or more.
Realistically, I don't think the majority of readers do intentionally change their
allocations much, if at all, from year to year. They just may let their
investments rise or fall where they may. The allocation changes recommended
in this Newsletter are for those who are concerned just
how far investment values have risen over the last 5 years and are willing
and able to act proactively in an attempt to protect themselves from
downdrafts. All this should be undertaken with full knowledge that even
if stocks do go down, they may not stay down long enough to have made a lower
Overall Allocations to Stocks, Bonds, and Cash
For Moderate Risk Investors
Current (Last Qtr.)
For Aggressive Risk Investors
Current (Last Qtr.)
For Conservative Investors
Current (Last Qtr.)
Model Stock Fund Portfolio
Our Specific Fund Recommendations
Recommended Category Weighting Now (vs Last Qtr.)
-Fidelity Low Priced Stock (FLPSX)
-Tweedy Brown Global Value (TBGVX) (C & M) -Vanguard Internat. Growth (VWIGX) (A)
-Vanguard Pacific Index (VPACX) (A)
-Dodge & Cox International Stock (DODFX) (A)
(See Notes 1, 2, and 3.)
-Vanguard 500 Index (VFINX)
-Fidelity Large Cap Stock (FLCSX) (A) (See Note 4.)
-Vanguard Growth Index (VIGRX)
-Fidelity Contra (FCNTX)
Stock or bond funds with (C) are particularly recommended for Conservative investors; likewise, (M) for Moderate; (A) for Aggressive.
ETFs (exchange traded funds) of the same category can be substituted for any index mutual fund in this table;
e.g. Vanguard MSCI Pacific ETF (VPL) can be substituted for VPACX.
Our Oct. '13 recommendation, Oakmark International I (OAKIX), is now closed to new investors.
In its place, we now recommend Dodge & Cox International Stock (DODFX). Investors in OAKIX should continue to hold.
Our Jan. '13 recommendation, Yacktman Fund (YACKX), is also closed; investors in YACKX should also continue to hold.
Comments on Our Changes Since January
Fidelity Low-Priced Stock Fund (FLPSX) appears to be an outstanding choice with highly favorable characteristics.
Although the fund is considered in the Mid-Cap
Blend category, its holdings also encompass a substantial position in large caps and it retains a value orientation which
should be helpful.
We are reclassifying Vanguard Internat. Growth (VWIGX) as recommended for Aggressive, rather than Moderate Risk investors.
The fund has a substantial position in Asia, a region that is more risky than the composition of other diversified
international funds such as
Tweedy Brown Global Value (TBGVX) that have much less in that region. International funds in general, including those
that invest in Japan, have recently lost some of their luster, thus our downgrade.
(An alternate fund to VPACX that may appeal to more Moderate Risk investors would be Vanguard European Stock Index (VEURX) ).
Large Value stocks continue to be the most undervalued domestic stock category and the category has started to
show it may now pull ahead of Large Growth or Large Blend funds.
As we indicated in our Jan. Newsletter, as well as in this month's accompanying article also starting on page 1,
it may be better for most investors to choose
diversified funds than try to guess which sectors will outperform.
Model Bond Fund Portfolio
Our Specific Fund Recommendations
Recommended Weighting Now (vs Last Qtr.)
-PIMCO Total Return Instit (PTTRX) (High minimum investm. outside 401k),
or -Harbor Bond Fund (HABDX) (1K min.)
-PIMCO Real Return (PRRIX) (High minimum investm. outside 401k), or
-Harbor Real Return (HARRX) (1K min.)
-Vanguard Intermed. Term Tax-Ex. (VWITX) (see Note)
Intermed. Term Muni.
-Vanguard Sh. Term Inv. Grade (VFSTX)
-Loomis Sayles Retail (LSBRX)
-Fidelity High Income (SPHIX)
-PIMCO Foreign Bond (USD-Hedged) Adm (PFRAX)
Note: Select a fund, if available, that has your own state's bonds for double-tax exemption.
PIMCO Total Return Instit (PTTRX) and other classes of the fund as well as HABDX) may be losing their
mojo a little from prior years. (See the accompanying
article which shows PTTRX came close to, but did not surpass, the performance of the average bond fund over the last
5 years.) In the past, there have been periods where the fund fell into a short-lived slump and we guess it may
have underwent one recently. However, we feel other funds are now worthy of greater
Intermediate-term municipal bonds look relatively attractive to most investors compared to taxable government bonds or even
Vanguard Total Bond Market (VBMFX) because their after-tax yields are generally higher with only slightly greater risk.
We believe muni bond prices will continue to be supported by purchases of high income investors whose tax rates
have gone up since Jan. 2013.
Although the potential return appears small, short-term corporate bonds should not be as vulnerable as longer-term
bonds if interest rates rise or if the economy strengthens. VFSTX is a good alternative to cash.
PIMCO Foreign Bond (USD-Hedged) Adm represents a good opportunity to diversify away from U.S.-only bonds
because U.S. interest rates may rise faster than those abroad. Its hedging may pay off if the dollar rises.
Although the dollar has been falling lately, higher interest rates in the U.S. may cause the dollar to resume its longer-term
rise since mid-2011.
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