(PUB) Investing 2016

November 2016 Vol. 25 No. 3

FundInvestor Research and recommendatio s for the s riou fund investo

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The Story of Two Bears and Two Bulls

path to better risk-adjusted returns was through superior risk-reduction rather than high returns, and that’s worth remembering this long into the current market rally. Because I am focusing on funds with manager tenure over the whole period, I am slightly skewing results to the positive side as poor-performing managers are more likely to have been fired. But I think this is a revealing look at those fund managers who have had the longevity to stick around. Large Growth So few large-growth funds are beating their bench- mark lately that it is truly striking to see how many large-growth funds have beaten the Vanguard Growth Index VIGAX over this time period. One key part to that story is that the earlier bear market was a perfect storm for large growth in general and large- growth indexes in particular. The indexes are market- cap-weighted, and when you have an extreme growth rally like we saw in the late ‘ 90 s, that can mean that large-growth indexes skew heavily to overpriced growth stocks. The ensuing bear market was pretty much the opposite of the current environment when a few names dominate performance in a way that makes the benchmark very tough to beat. The common theme among the funds that beat the index by a significant margin is fundamentals. All of these funds stayed focused on deep research on company fundamentals including valuation, and that helped stock-picking shine through. On the other hand, funds that chased hot trends or ignored valuation got crushed.

RusselKinnel, Director of ManagerResearch and Editor

Fund Reports

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The 2008 – 09 bear market made a bonfire of financials stocks, but all the other sectors were hit fairly hard, too. The 2000 – 02 bear market crushed tech stocks, but other areas held up fairly well. As Kevin McDevitt points out in the Morningstar Research article on Page 8 , no two bear markets are the same. Kevin explains why and what that means for building a defensive portfolio. I’ve taken a different tack here by looking instead at what that earlier bear market tells us about some fund managers. The 2000 – 02 bear market has fallen out of the standard trailing return figures now, so I thought “Why not add them back in?” We now have two big bear markets and two ensuing rallies to measure when we go back to March 2000 , and I was curious to see which funds look best when viewed through that broad lens. I only wanted active managers who were there at the beginning of that first bear market. I looked at funds by Morningstar Category versus an index fund on a total-return basis and on a risk-adjusted basis as measured by the Sortino ratio. Sortino isn’t too different from the Morningstar Rating, but it does allow custom time periods whereas the star rating stops at 10 years. What emerged is a better picture of funds that have delivered for investors over full market cycles. To be sure, there are no guarantees that past is prologue, but some solid funds rose to the top while others failed to keep up with a comparable index fund. For many, the

Fidelity Mortgage Securities T. Rowe Price Int’l Discovery Templeton Global Bond

Morningstar Research 8 Preparing for the Next Bear Market

The Contrarian

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Tone-Deaf Fund Companies

Red Flags

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Technology-Investing Underachievers

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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Your RMD Questions Answered

Tracking Morningstar

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Analyst Ratings

Income Strategist 20 The Strange Mechanics of Negative Bond Yields

Changes to the 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

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