(PUB) Morningstar FundInvestor

September 2013

Morningstar FundInvestor

3

much, and that’s also helped investor returns. Funds that close tend to have strong investor returns as they often close near their peak. The Worst Investor Returns Warning, this article is about to get depressing. I will look at the funds with the worst 15 -year investor returns, and it isn’t pretty. It’s a lesson about hopping onto a fund after a great run. In this case it’s mainly about growth funds that were brilliant in the late 1990 s and suffered a brutal bear market. Even after the bear market, growth lagged for quite a number of years. However, the main point is don’t jump on funds with huge three-year returns as they are likely to see a big downdraft. Five funds in the Morningstar 500 actually produced negative investor returns over the past 15 years. Had you simply bought Vanguard Total Stock Market Index VTSAX or Vanguard Total Bond Market Index VBTLX and held it over that time, you’d have earned a little more than 5% annualized. Some of the funds with negative investor returns actually beat those figures with their total returns, but investors made a mess of it by buying at the top and giving up near the bottom. Janus Research JAMRX (née Janus Mercury) had a decent 5 . 8% annualized 15 -year return turned into a dismal 2 . 5% investor-returns loss. Like the rest of Janus, it rode a wave of tech-stock popularity to great returns right up until the bear market hit in March 2000 . Nearly all of the fund’s assets came through the door in 1999 and 2000 when it hauled in $ 5 . 4 billion and $ 4 . 1 billion. So, most of its investors came in right near the top. The flows reversed course in 2001 with $ 944 million going out the door in 2001 and $ 1 . 2 billion in 2002 . This was followed by $ 955 million in 2003 . Thus, a huge sum went out right near the bot- tom in late 2002 . The fund has been in steady out- flows since then, though it had a trickle of inflows in 2007 . The fund’s performance has actually been respectable albeit volatile. It generally beat its peers in good years and got thumped in bad ones. For instance, it lost 44% in 2008 then gained 43% in 2009 . But it

isn’t just the case of a volatile fund that was too hot to handle. The market-timing scandal hit Janus in 2003 , and that undermined investor confidence just as the fund was rebounding. In addition, manager Warren Lammert left in 2003 , then David Corkins left in 2006 . When Corkins left, the fund switched to an analyst-run format. That tumult has also made it hard for investors to stick around. Janus Fund JANSX also has a dismal 0 . 95% in- vestor-return loss, and it, too, suffered from volatility and manager changes. Only it also produced poor total returns, so it would have been awfully tough for investors to squeeze a good return out of that. Janus Twenty JAVLX is also on the 10 worst list, though, like Research, it produced pretty good 15 -year total returns. The second-worst fund on the list comes from Van- guard. That’s right. In one of the darker chapters at the firm, Vanguard took over a momentum fund at the exact market top. Turner Growth Equity became Vanguard Growth Equity VGEQX in March 2000 . That brought with it $ 1 billion in inflows in 2000 . As it turned out, that was the only year in the fund’s exis- tence that it received significant inflows. There wasn’t the drama we saw in the Janus example, but there was a similar result from an influx at the top. However, momentum went into a long funk, and the fund has endured mediocre results since then. Van- guard wasn’t happy with Turner’s results. It added a second subadvisor, Baillie Gifford, in 2008 and fired Turner in 2009 , replacing the firm with managers from Jennison.The fund’s 10 - and 15 -year total returns are below average, and it’s clear why its 15 -year investor return is negative 2 . 2% . Turner Midcap Growth TMGFX is also on the bot- tom 10 list despite a strong 7% annualized return. That 7 . 1% total return became a tiny 0 . 1% investor return as momentum’s ups and downs proved too much for many investors. Volatility and extended periods of being out of favor are a recipe for poor investor returns.