You can learn a lot by looking at the quarterly update of mutual funds and reading between the numbers.
Knowing that the average fund investor isn't a big fan of sifting through charts filled with numbers, here are some nuggets that become evident from a careful reading of the quarterly results:
Everything bad is good again.
OK, maybe not everything, but a remarkable number of funds that are the absolute worst fund in their category over several long-term periods of time have been winners in the shortest of time frames.
On Lipper Inc.'s list of leading and trailing funds by asset class, the worst large-cap core fund year-to-date and over the past 52 weeks, the Direxion S&P; 500 Bull 2.5X fund (DVSLX) - which is designed to move 2 1/2 times a bull market - is the top fund in the peer group over the past week and month (having gained about 11 percent in the past four weeks).
It is not surprising to see a souped-up, leveraged fund playing at the extreme ends of its asset pool, but there were plenty of other, more mainstream names that had the yin-and-yang of performance. Forester Value (FVALX) was Lipper's worst fund among large-cap value funds over the past five years, despite being the top fund in the group year to date; its sister fund, Forester Discovery (INTLX), pulled off the same feat among international multicap core funds.
Likewise, Hotchkis & Wiley Small Cap Value (HWSIX) is the laggard over the two- and three-year time horizon but leads small value funds over the past month. B2B Internet HOLDRs (BHH) have lagged all science and technology funds over the past three and five years but have been at the front of the pack for the past month and so far in 2008.
Expand the horizon so that it includes the top and bottom 10 funds in a peer group, and the number of funds appearing in both places quickly gets big. And the trend is prevalent in fixed-income funds, too, so it is not a phenomenon that is peculiar to stocks.
Investors need to recognize that a fund that can live at the extremes of performance may give a ride that is too hard to handle. The same things that pick you up one day can be precisely what hold you under water the next. Even when the circumstances are reversed - and a long-term winner shows up on the list of short-range laggards - the volatility has the potential to scare an investor off, and probably should.
An ideal fund is one that shareholders can hang on to without looking at any quarterly statement and wanting to rip their hair out.
Diversification works over time. ...
Take a look at charts showing performance by investment objective, and it is easy to see why investors want to build a portfolio of funds and spread money around. Among diversified U.S. equity fund types, 15 of 17 categories are negative year-to-date, but 14 of the categories show an annualized average return over the past five years that is better than 9 percent. Look at the interim figures, and you will see all manner of struggle. But spreading money around clearly would smooth out the ride.
It is even more obvious among world equity funds, where 24 of 26 categories are negative in 2008, but all 26 categories average double-digit gains over the past five years, with the lowest annualized average gain standing north of 13 percent.
But misery loves company right now.
Flip those investment statistics, and it shows that unless you resort to funds that are built to go against the trend, the fact that all of those asset classes are down means that avoiding short-term loss without going to cash or bonds is mighty hard. Gold funds and Latin American funds were two groups among world-equity issues to be positive year-to-date; among diversified domestic funds, only bear-market and "specialty" funds were in the black for the quarter.
Why mutual fund statistics drive investors nuts.
It was almost a clean sweep for the Ivy Cundill Global Value fund (ICDAX) in the global small/midcap value category, with the fund taking top honors in every time period from four weeks through five years. Alas, in every time period from 52 weeks and longer, the fund was also the worst in its peer group. Same fund, top and bottom, with 14.94 percent annualized average gain over five years.
That is what happens when the research firms make a new category that has only 10 funds in it, most of them new. The industry will solve its own problem, however; in the next 24 months, plenty of fund firms will create their own "smidcap" value funds, hellbent on coming up with something that can top the charts in a small-sample world.
Charles Jaffe is senior columnist for MarketWatch. His postal address is Box 70, Cohasset, Mass. 02025-0070.