Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

Welcome to our 33rd annual Mutual Funds Guide. Like last year, there are two versions: a print version containing information on more than 730 funds, and an online version that has been expanded this year to cover more than 1,630 funds.

In helping to put together this year’s Guide, I noticed a few interesting trends and developments. One of them is the improvement in five-year returns for equity funds, thanks to a calendar shift. Since I discuss this in the guide, I want to use my editor’s note to point out two other notable trends.

Last year’s rally rewarded investors for taking risk. A close look at the large-cap funds appearing in the print version of this Guide quantifies this observation. Domestic large-cap funds with category risk index scores of 1.10 or higher, meaning they have experienced at least 10% more return volatility over the past three years than their peers, realized an average 37.2% gain in 2013. Domestic large-cap funds with category risk index scores of 0.90 or lower, meaning they experienced at least 10% less return volatility than their peers, realized an average 29.5% gain in 2013.

Now, let’s look at how the same funds performed in 2008. The most volatile group, those funds with current category risk index scores of 1.10 or higher, lost 43.5% on average. The least volatile group, large-cap domestic funds with current category risk index scores of 0.90 or lower, fared better with an average loss of 31.3%. [In case you are wondering, the comparison is almost exactly apples-to-apples. The only fund without 2008 return data was Davenport Value & Income (DVIPX), which was in the low-risk group.]

The difference reveals the impact of market conditions on fund objectives and manager styles. Those funds designed to be more aggressive or run by more risk-seeking fund managers performed better in 2013, as they should have during an unusually good year for the market. Those funds designed to be more conservative or run by more risk-adverse managers underperformed in 2013, but held up better during the turbulent year of 2008. This is how we would expect these funds to perform. So if your fund underperformed last year, but has a category risk index score below 1.00, take a look at how it did in 2008. It may actually be well-managed.

However, a problem may exist if a fund fared worse than its category peers in both 2008 and 2013. For example, Fidelity fund (FFIDX) lagged its peers during both years. It also lagged its peers in 2009, 2010, and 2011. The fund alternates among growth, value, and growth & value approaches, but the consistent lackluster performance raises questions about the manager’s strategy and stock selection.

Prevailing financial market conditions not only affect stock funds, but bond funds too. Bond funds are dependent on a stable or falling interest rate environment, exactly the opposite of what occurred last year. Yields on the benchmark 10-year Treasury note surged by nearly 80% in less than four months last year, jumping from 1.63% on May 2, 2013, to 2.90% on August 22, 2013. The spike in rates was so quick and sharp that PIMCO’s Bill Gross called it a “bear-market run” in Barron’s last month.

The change in rates had two impacts on bond funds. First, it hurt returns for most bond fund categories. (The funds that were the most affected were those with the most sensitivity to changes in U.S. government bond yields.) It also caused investors to pull money out of bond funds, making it tougher for bond fund managers to react to the shift in rates. The influence of these factors can be seen in the numbers for the PIMCO Total Return fund (PTTDX). The large bond fund incurred a 2.3% loss last year, while its assets under management (AUM) fell by 24%.

While it can be tempting to react to the latest data, investors commonly underperform the very same funds they hold because they jump in and out too frequently. Those investors who take a long-term view toward fund selection and limit their transactions realize higher returns.

Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal

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


William from NY posted 12 months ago:

Would it be possible for AAII to provide coverage of closed-end funds as well as ETFs?

Jane Gabrilove from CA posted 12 months ago:

I would be interested in closed end fund coverage and ETF coverage as well. Thanks!

Ricardo Moran from FL posted 11 months ago:

I would also welcome coverage of ETFs and CEFs in future editions. Thank you and congratulations on the excellent work.

Carol Magee from AR posted 11 months ago:

I trade rtfs and closed in funds.

Charles Rotblut from IL posted 11 months ago:

For closed-end fund information, I suggest going to the Closed-End Fund Association's website. They have a lot of information and a good screener.

We publish an ETF Guide every August, in the Journal.


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