Mutual fund returns show where money is being made and that benchmarks are hard to beat
By Dian Vujovich
Plenty of money has continued to flow into bond funds. Stock funds, on the other hand are having a tougher go of it even though their returns have been juicy.
With interest rates so very very low and a stock market that’s entering the fourth year of a bull market, you’d think money would be flowing into stock funds rather than bond funds. But, that’s not really the case.
And it’s kind of goofy if you ask me. Particularly when you look at the kinds of equity fund returns investors have been getting this year.
According to figures from Lipper, year-to-date performance numbers through March 8, show the average U.S. Diversified Equity Fund up 9.6 percent. The three fund types enjoying the biggest average gains under that heading were large-cap growth funds, up12.5 percent; mid-cap growth funds, ahead 12.45 percent; and multi-cap growth funds, up 12.36 percent.
Under the Sector Equity Fund heading, where the average returns were nearly 9 percent, international real estate funds have provided shareholders with the dandiest returns on average—17.8 percent. Next in performance line were global financial services funds, up 15.1 percent followed by global science/technology funds, up nearly 15 percent.
No matter how you slice it, those are incredibly positive returns and that upward trend has been going on for years.
But, as we’ve seen time and time again, investors can be chickens after experiencing the damage a bear market can do to their personal wealth and equity portfolio returns. The problem with that is being chicken for long often means missing out on market rallies like the one that’s been going on in equities. Example: For the three years beginning March 5, 2009 and ending March 8, 2012, the average U.S. Diversified Equity Fund has returned nearly 29 percent.
It’s no secret that money has been flowing into bond funds in a huge way for the past few years. According to data from Morningstar, ” Taxable-bond assets have more than doubled in the little more than three years since the end of 2008, increasing to $2.1 trillion from $1.0 trillion….Meanwhile, about $200 billion has fled U.S. stock funds.”
But while money has been flowing into bond funds, returns on them aren’t so hot.
Going back to Lipper figures and looking only at the world of taxable bond funds, year-to-date performance figures are puny averaging 2.57 percent. World equity funds have gained the most, up 4.6 percent and within that lot emerging markets debt funds trumped all—up on average 7.6 percent.
For the past three-years, all types of taxable bond funds have returned on average 11.3.percent.
So what’s today’s investor to do? For openers, remember the following: First, the markets aren’t stagnant—they are forever in flux. Second, realize that interest rates are not going to stay low forever. Third, no matter what’s going on in the markets diversification is always important. (That means having investments in both stocks and bonds makes logical sense.)
And finally, when it comes to equity investing within the mutual fund arena, picking the right funds to go with can be as tricky as building your own portfolio of individual stocks. That said, most recently it has been hard to top the performance of passively managed index-related equity funds.
In 2011, only 16 percent of actively managed equity funds beat their benchmarks, according to SPIVA (S&P Indices Versus Active Funds Scorecard).
Looked at another way, 84 percent of actively managed U.S equity funds underperformed their benchmarks last year. And during the past three and five years, 56 percent and 61 percent of equity funds also underperformed their benchmarks.
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