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Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

The mutual funds with the best five-year annualized performance are featured here. Though we update this article annually, this year’s top fund categories are different from those of the past few years. A calendar shift and five years of recovering stock prices has pushed equity funds and equity fund categories to the top of the rankings.

On paper, the numbers look good, but not all investors have benefited fully from them. Rather, only those investors who have been willing to ride the bull the entire time have reaped all of the good performance. This is why I chose to take some liberties with an analogy and put a bull rider on the front cover.

During the years I spent attending the Houston Livestock Show and Rodeo (which coincidently is being held this month), I learned the two basic components of scoring in bull-riding competitions. The first is the duration of the ride. If the rider does not keep his hand on the rope or fails to stay on the bull for eight seconds, he does not receive a score. The difficulty of the bull is the second component. The more a bull kicks, spins and drops, the higher the score is. The rationale is that it is easier to stay on a docile bull than it is to stay on one that is rightfully angry.

Though there are differences—you never have to worry about being kicked, thrown, gored or trampled on by the market, at least not in a literal sense, and scores are given regardless of the length of time you stay invested—bull riding is not unlike investing in a bull market. During the past five years, Mr. Market has kicked and spun. Investors have been confronted with the European debt crisis, the fiscal cliff, debt-ceiling fights, fears about a double-dip recession, lackluster economic growth and a market correction. It has not been a smooth ride.

Yet those investors willing to endure have reaped the benefits of riding the bull market. We can see this in the five-year returns of mutual funds. Nine out of the 10 the best-performing mutual fund categories are on the equity side. The only bond category to crack the top 10 rankings is convertible bond, which targets bonds that are convertible into stocks.

As you look at the five-year numbers of the best-performing funds, be sure to look at the category risk index scores as well. Though some fund managers do attempt to boost their returns with aggressive strategies—not unlike a bull rider who uses a suicide wrap (running the rope between the pinkie and the ring finger) as an attempt to stay on longer—many of the best-performing funds incurred less price volatility than their peers. In other words, shareholders were rewarded for merely taking on more risk by sticking with equities.

The last sentence is an important point. The benefits of just sticking with a long-term allocation more than compensate you for ignoring the short-term volatility of the market, no matter how fearful or pessimistic your forecast is. In the April or May issue, I will back up the sentence with numbers.

Thinking long-term and ignoring the market’s short-term volatility certainly is not new guidance. John Maynard Keynes learned the importance of it during the 1920s and the 1930s. You can learn about his evolution from short-term speculator to long-term value investor here.

I realize that Keynes’ views on economics are a source of controversy for some of you, and I want to stress that this article is not about economic policy. (There are other outlets for debating the pros and cons of Keynesian economics.) Rather, this article is about the lessons Keynes learned from managing money and how you can use his experience to become a better investor.

Be sure to visit AAII.com/Journal to see this month’s Briefly Noted articles. (We didn’t have enough space to include all of them in the printed magazine.)

Wishing you prosperity
Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/CharlesRAAII

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


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