AAII Journal Editor
2012 Mutual Fund Guide
This year’s expanded guide covers more than 1,520 funds.
Timeless Rules for Fund Investing
Great guidance on how to select a mutual fund.
AAII Discussion Boards
Besides performance, what do you look for in a fund?
This week’s AAII Sentiment Survey results:
Bullish: 42.7%, down 8.9 points
Neutral: 30.7%, up 2.5 points
Bearish: 26.6%, up 6.4 points
February 9, 2012
February 2, 2012
January 26, 2012
January 19, 2012
January 12, 2012
January 5, 2012
December 29, 2011
December 22, 2011
December 15, 2011
December 8, 2011
November 30, 2011
November 24, 2011
November 17, 2011
November 10, 2011
November 3, 2011
October 27, 2011
October 20, 2011
October 13, 2011
October 6, 2011
September 29, 2011
September 22, 2011
September 15, 2011
September 8, 2011
September 1, 2011
August 25, 2011
August 18, 2011
August 11, 2011
August 4, 2011
July 28, 2011
July 21, 2011
July 14, 2011
July 7, 2011
June 30, 2011
June 23, 2011
June 16, 2011
June 9, 2011
June 2, 2011
May 19, 2011
May 12, 2011
May 05, 2011
April 28, 2011
April 21, 2011
April 14, 2011
April 07, 2011
March 31, 2011
March 24, 2011
March 17, 2011
March 10, 2011
March 03, 2011
I noticed something peculiar as I was writing the about the mutual funds with the best five-year performance for the forthcoming March AAII Journal: The number of holdings didn’t seem to impact performance. Among the domestic large-cap funds with the best five-year performance was one that held over 1,000 securities, Reynolds Blue Chip Growth (RBCGX), and one that held just 53, Yacktman Focused (YAFFX).
Given the vast difference in the size of the portfolios, I wondered if this was a fluke coincidence or if the number of holdings has little actual relation to performance. So I ran an analysis on our expanded listing of mutual funds, which is posted on AAII.com as part of our 2012 Guide to the Top Mutual Funds. I focused on the large-cap domestic stock fund category, which is the largest category in terms of the number of funds covered.
In doing the analysis, I excluded any mutual fund that was a fund of funds; these funds invest in other mutual funds. I also excluded any leveraged funds, which use different portfolios and are subject to an above-average level of volatility in their returns. Finally, I excluded those funds that lacked five-year return histories. This left me with just shy of 300 funds to work with. I broke this group down into its top and bottom deciles—the funds with the 30 most and fewest number of holdings.
Large-cap funds with the largest number of holdings invested in an average of 953 securities, based on the most recent portfolio information available as of early January 2012. Index funds skewed this number upward, with Fidelity Spartan Total Market Index (FSTMX) holding in excess of 3,200 stocks. Funds in this group had portfolios with an average market capitalization of $35.9 billion. The 10 largest positions comprised, on average, a 19.3% weighting in the portfolios. The average annualized return for these funds over the past five years was 0.0%, slightly better than the large-cap stock category average of -0.3%.
The actively managed large-cap funds with the largest number of holdings invested in an average of 397 securities. Skewing this number higher was Fidelity Stock Selector All Cap (FDSSX) and the aforementioned Reynolds Blue Chip Growth (RBCGX), which held 1,029 and 1,025 securities, respectively. The funds in this group had portfolios with an average market capitalization of $28.7 billion. The 10 largest positions comprised, on average, a 21.5% weighting in the portfolios. The annualized average return for these funds over the past five years was 0.4%.
The actively managed large-cap funds with the fewest number of holdings invested in an average of just 27 securities. The actual range of securities was fairly narrow with Hennessy Total Return (HDOGX) investing in just 17 securities, while Aston/Montag & Caldwell (MCGFX), Haverford Quality Growth Stock (HAVGX), and Weitz Value (WVALX) capped the other end with 34 securities each. (Because MCGFX, HAVGX and WVALX all held 34 securities, I expanded the fewest holdings group to 31 funds instead of 30 funds.) The funds in this group had portfolios with an average market capitalization of $40.8 billion. The 10 largest positions comprised, on average, a 52.3% weighting in the portfolios. The annualized average return for these funds over the past five years was -0.3%.
The numbers show an advantage to funds that held a large number of securities as opposed to a small number of stocks during the past five years. The talent of the manager appears to play the biggest role in influencing comparative performance, however. The 30 actively managed funds with the highest allocation to their 10 largest holdings beat those with the lowest allocation to the 10 largest holdings (average annualized five-year return of 0.8% versus 0.1%).
There are a two caveats to keep in mind. First, this analysis looked at a single five-year period and only at large-cap funds. If the analysis were to be expanded to cover other fund categories and other time periods, the results may or may not be different. Second, expense and tax-cost ratios were the lowest in the group that held the index funds. Regardless of how talented an active fund manager is, he still has to realize performance good enough to overcome the extra expenses that shareholders may incur by not simply holding index funds.
More on AAII.com
- The Individual Investors Guide to the Top Mutual Funds 2012 – Our 31st annual guide covers more than 1,520 funds on AAII.com. It also contains a downloadable spreadsheet that you can use to conduct an analysis similar to the one discussed above.
- Nine Timeless Rules for Investing in Mutual Funds (and ETFs) – This 2009 article by former AAII President John Markese gives great guidance for selecting a fund, and links to other useful articles on AAII.com.
- The Individual Investor’s Guide to Personal Tax Planning 2011 – A friendly reminder that your 2011 taxes are due two months from today.
- Besides Performance, What Do You Look for in a Fund? – Tell us on the AAII.com discussion boards.
- AAII Stock Screens – The more than 60 stock screens on AAII.com have just been updated.
- Don’t forget to take the Sentiment Survey.
Model Portfolios Updated on AAII.com
There were no transactions for the model portfolios during the month of January.
Last month, the Model Shadow Stock Portfolio gained 10.4%, beating both the Vanguard Small Cap fund (NAESX), which gained 7.0%, and the DFA US Micro Cap fund (DFSCX), which also gained 7.0%. During the past 12 months, the Shadow Stock Portfolio gained 20.1%, while the Vanguard Small Cap fund rose 3.1% and the DFA US Micro Cap fund rose 4.6%.
The Model Mutual Fund Portfolio gained 5.4% for the month. This compares to the Vanguard Total Stock Market fund (VTSMX), which gained 5.1%. During the past 12 months, the Model Mutual Fund Portfolio gained 2.6%, while the Vanguard Total Stock Market fund rose 3.9%.
The Model ETF Portfolio gained 6.4%, outperforming the 80% SPDR S&P 500 ETF (SPY) and 20% iShares MSCI EAFE Index ETF (EFA) benchmark, which gained 4.6%. During the past 12 months, the Model ETF Portfolio is has risen 1.7%, while its benchmark rose 1.3%.
The Week Ahead
The U.S. financial markets will be closed on Monday in observance of President’s Day.
Approximately 40 members of the S&P 500 will report earnings next week, in what should be the last busy week for the first-quarter earnings season. Included on next week’s calendar are Dow components The Home Depot (HD) and Wal-Mart (WMT), both of which will report on Tuesday.
It will be a slow week for economic data. The first report, January existing home sales, will not be published until Wednesday. January new home sales will be published on Friday, along with the University of Michigan’s final February consumer sentiment survey.
No Federal Reserve officials are currently scheduled to make public speeches.
The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.
AAII Sentiment Survey
Bearish sentiment rebounded to its highest level since December 29, 2011, in the latest AAII Sentiment Survey. Bullish sentiment remains above its historical average, however.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 8.9 percentage points to 42.7%. This is a seven-week low for optimism. Even with the drop, bullish sentiment stayed above its historical average of 39% for the eighth consecutive week and the ninth out of the last 10 weeks.
Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 2.5 percentage points to 30.7%. The historical average is 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded to 26.6%, a rise of 6.4 percentage points. This is a seven-week high for pessimism. Even with the increase, bearish sentiment remains below its historical average of 30% for the seventh consecutive week, and the eighth out of the last nine weeks.
A shift in attention back to Greece's fiscal problems has caused some individual investors to become less optimistic about the six-month direction of stock prices. It is also likely that the downward drift in the markets is having an impact, though some of the shift simply reflects a reversion back toward the historical averages registered by the survey.
Even with the increase in bearish sentiment, improving U.S. economic conditions are causing many individual investors to be hopeful that stock prices will rise over the next six months. Bullish sentiment remains above 40%, as it has throughout all of 2011 so far.
This week’s special question asked AAII members which industries or sectors they like right now. Energy and technology tied as the preferred sectors. Several members expressed interest in real estate, either real estate investment trusts (REITs) or home building stocks. Many members also said they favor health care and pharmaceutical stocks. When the same question was asked last November, members favored energy and technology stocks, followed by health care and utility stocks.
Wishing you prosperity,
Charles Rotblut, CFA
AAII Journal Editor