Mixed Bag

William Ehart

MY LAST BLOG POST—about value-oriented Dodge & Cox Stock Fund—got me looking at the long-term returns for some highly touted large- and mid-cap growth and blend funds from 15 years ago. My surprise: Of the 15 funds in my admittedly unscientific sample, six went on to outpace both the S&P 500 and an index fund focused on the same market segment.

The six winners are boldfaced in the accompanying table. Note: For two of the winners, Jensen Quality Growth and Vanguard Primecap, I used the S&P 500 as their style benchmark. The reason: Like the S&P 500, they have a blended investment style, rather than being pure growth funds.

I believe it’s important to judge funds not only against a comparable style index, but also against a broad market index, such as the S&P 500 or Wilshire 5000. Why? An investor needn’t necessarily own, say, growth or value funds, or have extra small- or mid-cap exposure. That decision is on the investor. Think of it this way: When you invest in a style-specific actively managed fund, you’re certainly hoping to beat the broad market over the long haul. Otherwise, what’s the point?

For my 15 celebrated funds from 2006, the range of outcomes has been quite broad. If you’d bought one of the 15, you had a 40% chance of picking a winner—meaning the fund beat both the S&P 500 and a comparable style index—and a 27% chance of ending up with a disappointingly bad loser. (Guess who bit on one of the losers at around that time? Ahem.)

Interestingly, your odds of good results were much better if you stuck with the big, established fund firms. Lesson: The volatile gunslingers who occasionally shoot the lights out, like Ken Heebner who still runs CGM Focus, can be hazardous to your wealth. (Ahem, lesson learned.)

Despite the success of six of the 15 funds, the experiment still illustrates indexing’s appeal. Four of the 15 funds were especially lackluster. One—the Bridgeway fund—was merged into a similar fund that also performed poorly. Others abruptly changed investment strategy, which happened at FPA Perennial, now named the FPA U.S. Core Equity Fund. That change in strategy saddled shareholders with a huge capital gains liability in 2015.

Then there’s the issue of manager tenure. You might find the right manager at the wrong time in their career. Case in point: After a great 28-year run, T. Rowe Price Blue Chip Growth manager Larry Puglia will retire at year-end.

How much longer will Brian Berghuis of T. Rowe Price Mid-Cap Growth (tenure: 29 years), Steven Wymer of Fidelity Growth (25 years) and Fidelity Blue Chip Growth skipper Sonu Kalra (12 years) run their funds? That’s the tough question that both existing and potential investors need to ask themselves.

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