Mutual fund mixology
Here's how three suggested fund portfolios fared in 2000
NEW YORK (CNNfn) - It's easy to understand why some people look at past performance when they decide where to invest in mutual funds. They put their money in the year's winners because, like most things in life, nobody wants to bet on a loser.|
In 2000, anybody who practiced "rearview window" investing got the whipping of a lifetime. Technology and growth funds, which have become the mainstays of many portfolios after triple-digit returns, were among the biggest losers in a dark year for mutual funds.
"A lot of people were new to the market and probably were heavy in technology," said Scott Cooley, an analyst at fund-tracker Morningstar. "They're probably wondering why they got into investing. It's a lesson in diversification. Diversification is boring, but it works."
CNNfn.com this summer asked three well-known financial pros to design a can't-fail portfolio for an investor with a 10-year horizon, as part of a special report, The Road to Riches. One plan was for conservative investors, one for moderates and a third for aggressive investors.
Sheldon Jacobs, editor of the investing newsletter No-Load Fund Investor, said at the time that his conservative plan is a good option for people who think the market can't possibly keep going up forever.
Click here to see CNNfn.com's special report, The Year in Review.
Cooley at the time said his moderate plan is cost-effective and easy to stick with in volatile times.
And Ron Roge, a certified financial planner and president of R.W. Roge & Co. in Bohemia, N.Y., said his aggressive portfolio would give more bang for the buck, with a 35 percent weighting in technology.
Aggressive plan gets pounded
As you can imagine, Roge's tech-heavy slate of funds took the worst hit in 2000. The portfolio as of Dec. 15 is down 14.79 percent, according to Morningstar.
All but two of the funds have double-digit losses, with Spectra suffering the most, down 32.53 percent, according to Morningstar. The fund, managed by prominent growth manager David Alger, represented 30 percent of the portfolio.
Two funds lost more than 20 percent, including Baron Small Cap, off 21.24 percent, and TIAA-CREF Growth Equity, down 20.07 percent.
The one bright spot for the aggressive lineup was Artisan Mid Cap, up 23.28 percent.
But Roge pointed out that TIAA-CREF Growth Equity is down only about half as much as the Nasdaq Composite.
Roge argued that high-voltage potfolios will see more volatility. A year with losses of 15 to 20 percent is normal. Long term, he says, the extra risks you're taking will pay off.
Moderate plan breaks even
Cooley's portfolio edged up 0.60 percent, with four out of the seven funds earning positive returns, according to Morningstar.
At the top of the list is Oakmark Select, up 22.79 percent, managed by top value manager Bill Nygren. Another big winner, a bond fund representing a substantial 30 percent of the portfolio, is up 11.74 percent.
The losers include Vanguard 500 Index, which mirrors the S&P 500 index, down 9.52 percent, and Harbor Capital Appreciation, a large growth fund, down 18 percent.
Cooley pointed out that the funds are doing well against their peers, a good sign that the funds are worth keeping.
"The portfolio had a value tilt so we got a break this year," Cooley said.
Conservative portfolio profits despite market
Jacobs' portfolio fared the best in 2000, up 7.20 percent, according to Morningstar. The best performer was Columbia Real Estate Equity, up 26.73 percent. Longleaf Partners International was up 24.71 percent.
(Morningstar didn't have year-to-date figures for Vanguard Inflation-Protected Securities Fund, which debuted this year. The fund invests in inflation-indexed bonds).
But on the fixed income side, Jacobs' recommended Heartland Taxable Short Duration Municipal Bond Fund had some trouble. The fund is one of three Heartland funds whose Net Asset Values (NAVs) plunged in a single day in October after Heartland re-priced bonds, according to Morningstar's Chris Kelch.
Heartland High-Yield Municipal Bond Fund lost 70 percent of its NAV, while Heartland Short Duration High-Yield Municipal Fund gave up 44 percent and the Heartland Taxable Short Duration Municipal Fund lost 6 percent, according to Kelch.
Jacobs said nobody could have anticipated such an unusual occurrence, or such steep losses. He pointed out that the fund he chose fell the least – but he still recommends investors find a replacement. He suggested Harbor Bond Fund.
Click here for a list of funds that Jacobs recommends for 2001. The list includes funds that did well in 2000 (a value year) and 1999 (a growth year).
"It's hard to draw a lesson from this because it's so unusual," Jacobs said. "I'm not sure there's a great lesson there except for the basic one of staying diversified, which we were."