Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - Multiple-Year Highs
Q. Don, over the past week or so we've been hearing a lot of talk abouthow the market is making "multiple-year recovery highs." How is theaverage mutual fund holder doing?A. That depends on two things: whether they held on during the bearmarket, and WHAT they have owned.
Q. That first one is a real issue, isn't it?
A. Definitely. People's tendency to panic and sell out when the marketfalls accounts for why the average investor gets a lower rate of returnthan the market averages show, or than his or her own mutual funds'published numbers indicate.
Q. OK, so let's talk about how the major averages and major types of fundshave done...
A. Right. The high point that the averages have returned to now is therally high of May 21, 2001 -- just 58 months ago today.
Q. And how have the major averages done?
A. Well, if you count price only, the Dow and S&P are flat for thosenearly-5 years. If you include dividends, the returns looks like this:
- S&P 500 Index +8.0%
- NASDAQ Compos +0.4
- DJIA +10.4
- Avg S&P 500 Index Fund +6.5%
Q. Those numbers are less that you could have gotten in the bank, or inmoney funds!
A. True. BUT, they are hardly representative of the whole story...
Q. How so?
A. Those numbers, for the S&P 500 funds, that Mr. Bogle and others haveadvised people to buy and hold, have been outperformed by just about anyother kind of fund you could name...
Q. Examples, details??
A. EVERY one of the Lipper's 20 International and Global indices is upmore than the S&P 500 funds. On average, +20.5% EVERY type of SECTOR funds' Lipper Index is up, by an average of16.1% 20 of the 25 diversified domestic funds indices are up, by an averageof 55.0% !
Q. So if people are "just now catching up" to where they were 5 years ago,they have not done real well...
A. Right. I guess breakeven is better thank the experience of people whopanicked near the bottom and stayed out during the 2003 rally. But notreally good.
Q. What have been the few LAGGING types of funds you mentioned, since theMay-2001 top?
A. As you might imagine from the things we've seen for so long, large-cap(like the S&P) and growth:
For context, the Lipper 1000 Index is up 15.4% after expenses forthose 5 years.
- Lipper Large-Cap Core Index +3.9%
- Lipper Growth Funds Index +1.2%
- Lipper Multi-Cap Growth Ix -2.3%
- Lipper Large-Cap Growth Ix -9.3%
- AND Lipper Science & Tech Fds Ix -25.5%
Q. Right, the technology funds still at the bottom of the barrel.
A. Afraid so! When you go down 75% or 80%, it takes a huge move to getback even.
Q. OK, what have been some of the best performers?
A. The message of the markets has been to expect some return of inflation,I think...
DOMESTIC FUNDS TYPES:
- Gold Funds Ix +229.0%
- Real Estate Funds Ix +155.1%
- Natural Resources Funds Ix + 95.5%
- Small-Cap Value Funds Ix + 87.7%
- Mid-Cap Value Funds Ix + 61.1%
Q. How about if people had the courage, or the good diversification sense,to go international?
A. Good point, although not very many did. About 7% of the stock-funds'overall assets back in 2001 were in world equity funds. NOW, it's up toabout 18%...
- Emerging Markets Funds Ix +164.8%
- Pacific Ex-Japan Funds Ix +117.8
- International SmallCap Ix +114.8
Q. So, what do you make of all this?
A. Well, I take three major points from it...
First, "buy and hold" is an incomplete thought: WHAT should a personbuy and (maybe) hold? In this case, the types of funds where there wasthe most education to hold on forever were the ones that were near thebottom of the heap. That tells me that what goes up most (remember thebig-cap and tech rally of '99 and '00?) has the potential to come down and"correct" the most. Academics call it mean reversion.
Second, there really is an issue about how to do well in investing.Not only do you need to have good stocks or funds, but one needs to be askillful investor as well. Good golf clubs AND a good player! Part ofthat skill is learning NOT to sell when is it scary, and NOT to load up andbuy more when it's a lot of fun.
Q. And third?
A. Well, what a surprise!... Diversify. Putting all your eggs in a singlebasket can have very good consequences, or very bad ones. Very fewinvestors had ALL their money in the top five best-performing types offunds. But an awful lot of people, judging by where the actual money wasand still is, have had the S&P-500 type and large-cap funds more thananything else, and have had an unhappy past 5 years.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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