Bad timing tempers bull market’s fund successes
BOSTON — If you’re inspired to celebrate the bull market’s turning a year old, keep the party a subdued affair.
Raise a glass to the dozens of mutual funds that doubled or even tripled in value since the stock market hit bottom on March 9, 2009. But choose your words carefully when you offer a toast.
In many instances investors in those funds haven’t come close to realizing such massive gains. That’s because they timed their moves in and out of funds poorly.
In volatile markets, there’s a greater tendency to latch onto a rising fund too late and miss most or all the upside. Then there are investors who bail too early from a falling fund and miss the rebound.
"Big gains and losses trigger emotional responses of fear and greed, and that’s when an ordinarily bright person invests like a dolt," says Russel Kinnel, director of fund research at Morningstar Inc. "They start thinking, ‘I’ve got to get into this fund, this manager is going to make me rich.’"
A couple of examples from the current bull market, which has sent the Standard & Poor’s 500 up 60 percent:
— Fidelity Select Automotive (FSAVX) gained 215 percent for the 12 months ended Feb. 28, thanks to the come-back-from-the-dead performance of auto industry stocks that the fund specializes in. But the $122 million fund’s investors averaged gains of only 73 percent, according to Morningstar. Poor timing meant that the typical investor shared only about one-third of the fund’s return.
— ProFunds UltraLatin America (UBPIX), which isn’t meant for buy-and-hold investors because it uses leverage. It spiked 221 percent by investing borrowed funds to magnify the returns of a Latin stocks index. The return for its investors? An average 129 percent. Although such a return is stellar, it was preceded by an 87 percent loss in 2008. And performance so far this year has been in the bottom 5 percent of its peer group.
Morningstar’s measure of investor returns quantifies the gap between a fund’s official return or loss, and the gains or pains investors actually experienced. It’s a sort of reality check that accounts for money investors have put in or taken out during a given period.
If a fund receives more investor cash right after posting strong returns and right before a period of poor performance, investor returns will be lower than the total return for the fund. That’s because more investors participated in the losses than the gains.
Investors aren’t necessarily dumb. Kinnel’s research shows the average investor often enjoys better returns than the average fund. That’s because most investors have a stake in large funds that tend to have lower costs per investor than smaller funds, which tends to improve results.
Filed under: money by Fred