The Value of Doing Your Research

By: Tom Madell | Fri, Feb 1, 2013
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Since the inception of my Newsletter's Model Portfolios in 2000, it has been my goal to help fund investors select what I expect to be solid fund choices. However, the funds I recommend are not likely to be those that will wind up at the top of the heap or those that will enable one to achieve a huge profit over a short period of time. Rather, I make the assumption that most investors want funds that they can hold without taking on huge risks. This means that while one may not do as well as when investing in the "hottest" of funds, one shouldn't have to worry that their choices may turn out to be merely "one-time wonders."

While many investors undoubtedly focus on my current choices of funds (see my Jan. 2013 article), it is important too to take a historical perspective. This can be accomplished by comparing our present recommendations to those we made in the past. What you will discover is that while we may occasionally introduce some totally new choices in our Model Portfolios, including ETFs, many of the funds we recommended years ago are among the funds I still recommend today. By and large, most, but certainly not all, of these prior choices have indeed lived up to our expectations and performed quite well.

In the discussion and tables below, I think you can get some additional insights into why it pays to be a long-term investor and how it is indeed possible to find good funds that will do well compared to benchmark indexes such as the S&P 500 and the comparable index for bond funds.


Funds from My Model Portfolios One Year Ago

Below is performance data on all the funds in my Jan. 2012 Model Portfolios.

Morningstar Data for My Jan. 2012 Model Stock and Bond Portfolios
Ordered by Percent of Recommended Allocation
Recommended Stock Funds Recommended Bond Funds
Fund (Symbol)(Percent of Portfolio) Tot.
Ret.
Fund (Symbol)(Percent of Portfolio) Tot.
Ret.
Fidelity Low Priced Stock (FLPSX) (20%) 18.5% PIMCO Total Return Instit (PTTRX) (32.5%) 10.4%
Nicholas Equity Income I (NSEIX) (20) 13.6 Harbor Bond Fund (HABDX) (32.5) 9.3
Tweedy Brown Global Value (TBGVX) (20) 18.4 Vang. Total Bond Mkt. (VBMFX) (32.5) 4.1
Vanguard Internat. Growth (VWIGX) (20) 20.0 PIMCO Real Return (PRRIX) (15) 9.3
Vanguard 500 Index (VFINX) (17.5) 15.8 Harbor Real Return (HARRX) (15) 8.4
Yacktman (YACKX) (17.5) 11.5 Vang. Intermed. Term Tax-Ex. (VWITX) (15) (No Fed. tax) 5.7
Fidelity Contra (FCNTX) (15) 16.3 Vang GNMA (VFIIX) (12.5) 2.4
Vanguard Growth Index (VIGRX) (15) 16.9 Vang. Interm. Tm. Treas. (VFITX) (12.5) 2.7
Vanguard Windsor II (VWNFX) (12.5) 16.7 Vang. Long-Term Inv. Gr. (VWESX) (10) 11.7
Vanguard REIT Index (VGSIX) (10) 17.5 Vang High Yield Index (VWEHX) (10) 14.4
Amer. Cnt. Real (REACX) (10) 17.8 PIMCO Foreign Bond (USD-Hedged) Adm (PFRAX) (5) 10.9
Vanguard Equity Inc (VEIPX) (5) 13.5 T Rowe Price Intl. Bond (RPIBX) (5) 6.1

Notes: Data thru year end.

Multiple funds were recommended for a given fund category, thus percentages allocated add up to more than 100%.

Twelve stock funds were listed in 7 different fund categories. If one selects just the single fund in each category that we had featured many times before, you will find that my choices, when weighted as I recommended at the time, returned 17.6% over the entire calendar year; the group included FLPSX, VWIGX, VFINX, VIGRX, VWNFX, VGSIX, and VEIPX This compares to a return of 16% for the S&P 500 index. We continue to like all these funds.

We likewise presented 12 bond funds, also in 7 different fund categories. Once again, if you select just the single fund in each category that I had included many times before, the resulting one-year performance turned out to be outstanding; These funds included PTTRX, PRRIX, VFIIX, VWITX, VWESX, VWEHX, RPIBX. When weighted as we recommended at the time, the Bond Portfolio returned an annualized 9.2% vs. a return of 4.2% on the most widely used bond fund benchmark, the iShares Core Total US Bond Market ETF (AGG). (Note: I use the after-tax equivalent return for investors in the 28% Federal income tax bracket when computing muni bond fund returns.) The only one of these funds we don't still recommend is RPIBX. Rather, we now prefer PIMCO Foreign Bond (Hedged) Adm (PFRAX).

Our total recommended Jan. '12 portfolio allocation to stock funds for Moderate Risk investors was 62.5%; for bond funds, 32.5%. The rest was in cash. (Note: Our allocation to stocks is always higher for Aggressive Risk investors but less for Conservative Risk investors.)


Funds from Three Years Ago (Jan. 2010)

Three years ago this January, my Model Stock Portfolio consisted of just the 7 funds shown below. The last column shows the 3 year annualized performance through Dec. 31, 2012.

Jan. '10
Recommended Fund
Recommended %
of Stock Portfolio
Category Annualized Long-Term
Performance
Vanguard Growth Idx (VIGRX) 30% Large Growth 11.6%
Vanguard Internat. Gr. (VWIGX) 25 International Large
Blend
6.2
Vang. Large-Cap Idx (VLACX) 22.5 Large Blend 10.8
Vang. Mid-Cap Growth (VMGRX) 7.5 Mid-Cap Growth 12.9
T. Rowe Price Value (TRVLX) 5 Large Value 10.7
Vanguard Small Cap
Growth Index (VISGX)
5 Small Cap Growth 14.8
Vanguard Small Cap Index
(NAESX)
5 Small Blend 13.6

Note: Performance shown does not include this January's over 5% gains for many stock funds; the above funds are in most instances doing even better, adding approximately 2% annualized to the performance shown above.

The Stock Portfolio, when weighted as I recommended in Jan. 2010, returned 10.4% annualized over the 3 year period. This compares to a return of 10.9% for the S&P 500 index. Of course, our portfolio was more diversified than the S&P 500 with our International fund accounting for all of the shortfall; also, the S&P index itself is not available to investors, only funds or ETFs which having varying expenses.

The Model Bond Portfolio from 3 years ago also consisted of 7 funds. (Note: There were also 2 Harbor Bond funds but these funds are practically identical to their corresponding PIMCO funds except that the expense ratios are higher but have a lower initial investment.) The 7 funds, when weighted as I recommended in Jan. 2010, returned an annualized 7.3% over the 3 year period. This compares to a return of 6.2% for the bond benchmark index (AGG). The table below shows the funds. The last column shows the annualized 3 year performance through Dec. 31, 2012.

Jan. '10
Recommended Fund
Recommended
% of Bond
Portfolio
Category Annualized Long-Term
Performance
Vanguard Tot. Bond Market (VBMFX) 12.5% Interm Term Govt 6.0%
PIMCO Total Return Instit (PTTRX) 40 Diversified 7.8
Vang. Interm. Term Tax-Exempt (VWITX) 15 Interm Term Muni 8.1
PIMCO Real Return Instit (PRRIX) 7.5 Inflation 9.5
T. Rowe Price Intl. Bond (RPIBX) 10 International 4.6
Vang. Sh-Tm Investment Gr. (VFSTX) 10 Short-Term Non-Govt 3.9
Vang. High Yield (VWEHX) 5 High Yield 11.3

Our total recommended Jan. '10 portfolio allocation for Moderate Risk investors was 57.5% to stock funds and 37.5% for bond funds. The rest was in cash.


Funds from Five Years Ago (Jan. 2008)

Five years ago this January, my Model Stock Portfolio consisted of 12 funds from 7 different categories. However, I show only the single fund from each category that we most often recommended in prior Newsletters up to that point. The last column shows each's annualized 5 year performance through Dec. 31, 2012.

Jan. '08
Recommended Fund
Recommended
% of Stock
Portfolio
Category Annualized Long-Term
Performance
Vanguard Growth Idx (VIGRX) 22.5% Large Growth 3.2%
Vanguard 500 Idx (VFINX) 22.5 Large Blend 1.6
Vanguard Mid Cap Growth (VMGRX) 7.5 Mid Cap Growth 3.8
MainStay ICAP Equity (ICAEX) 10 Large Value 1.3
Vanguard Intl Growth (VWIGX) 20 Foreign Large Blend - 1.4
American Cent. Intl Growth (TWIEX) 7.5 Foreign Large Growth - 2.2
Fidelity Pacific Basin (FPBFX) 10 Diversified Pacific/Asia - 1.4

The Stock Portfolio, when weighted as I recommended in Jan. 2008, returned 0.9% annualized over the 5 year period. This compares to a return of 1.7% for the S&P 500 index. Once again, the shortfall was entirely due to our 3 international picks. But diversification suggests that all but the most conservative of investors should maintain an international position.

The Model Bond Portfolio from 5 years ago consisted of 5 funds shown below. The bond portfolio, when weighted as I recommended in Jan. 2008, returned an annualized 6.6% over the 5 year period. This compares to a return of 5.9% for the bond benchmark index (AGG). The last column shows each's 5 year performance through Dec. 31, 2012.

Jan. '08
Recommended Fund
Recommended
% of Bond
Portfolio
Category Annualized Long-Term
Performance
Vang. Sh Tm Treasury (VFISX) 20% Short Term Govt 2.7%
T. Rowe Price Intl Bd (RPIBX) 10 International 4.8
PIMCO Total Return Inst. (PTTRX) 35 Intermediate Term 8.4
Vanguard LT Tax-Exempt (VWLTX) 25 Long Term Muni 7.9
Vanguard Infl Protected (VIPSX) 10 Inflation 6.7

Our total recommended Jan. '08 portfolio allocation for Moderate Risk investors

was 52.5% in stock funds, 30% in bond funds, and 17.5% in cash.


Funds from Ten Years Ago (Jan. 2003)

Normally, one wouldn't expect recommendations made any further than 5 years ago to still be useful to investors. That is because so much can change over such a long period as to render such judgments on funds hardly worth considering.

For example, one of the 6 funds I recommended 10 years ago (from Janus) no longer exists as such, and was merged into a series of other funds. Another went from being a great fund with a great long-term manager to a relatively poor fund with a revolving door of managers, the Fidelity Growth and Income Fund (FGRIX).

However, the 4 remaining funds would have turned out to be great buy and hold picks. Here the funds are with their 10 year annualized return. (Compare returns to the 10 yr. annualized return of 7.1% for the S&P index.)

All 4 of our 2003 bond fund picks, if held over 10 years, did better than the annualized bond benchmark of 5.2%

At the time, our overall allocations were 50% to stock funds, 50% to bond funds, and 0% to cash.


To Recap: Good Funds Can Usually Be Identified In Advance

While most stock funds held over the last 5 years have barely been positive through Dec. 2012, ten year returns have actually been quite good. And being well diversified between stocks and bond funds and many fund categories certainly paid off during the 5 year period that stocks did relatively badly.

I believe the above data justifies the following conclusion:

When one has access to information which potentially allows one to be able to identify so many excellent funds in advance of their subsequent performance, such as provided on the Morningstar site or in my research-based quarterly model portfolios, one has reason to feel a substantial degree of confidence. Thus, one can feel assured there is less reason to constantly worry about market conditions, or what funds are "hot" and those that are not. You should note though that, for the most part, the kind of generally excellent returns I show above are typically served up only to those willing to hold the identified funds for long periods.

 


 

Tom Madell

Author: Tom Madell

Tom Madell, Ph.D.
Publisher
Mutual Fund Research Newsletter
http://funds-newsletter.com

Mutual Fund Research Newsletter is a free newsletter which began publication in 1999. It has become one of the most popular mutual fund newsletters on the Internet, as shown on the Alexa.com "Top Sites" page for Mutual Funds News and Media Newsletter websites. Tom Madell, the Publisher, is a researcher and writer, as well as a long-term investor, whose investing articles have appeared on hundreds of websites, including the Wall Street Journal and USA Today, Morningstar, and in the international media.

Since we began publishing our Newsletter's quarterly Model Portfolios, the great majority of our Stock Portfolios have outperformed the S&P 500 Index over the following year, 3 years, and 5 years. Ours is one of the most consistent track records anywhere.

The site is unique in that it takes an empirical, technical analysis approach to forecasting which specific mutual funds will likely outperform the major stock indices, along with an economic, fundamental analysis.

You can become a free subscriber to the site, receiving occasional email notification as soon as new articles or investing alerts become available, by emailing funds-newsletter@att.net using "free subscription" as the subject. You can also reach me using the same address.

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