Thursday, February 5, 2009

Mutual Funds Have a Tough Decade

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It's been a rough decade for stock investors of all kind. Last March, before the real carnage of fall 2008 ensued we had written about "The Lost Decade" for US investors [Mar 26, 2008 - WSJ: Stocks Tarnished by Lost Decade] - similar to what Japan has been experiencing for 2 decades. I wrote

For the great many who live normal lives and investing is simply something they do through most large cap mutual funds (many of which are simply S&P 500 clones disguised to rake in large fees) in their regular accounts or 401ks, it's been a tough decade. And that's not adjusted for inflation in which real returns are clearly negative.

So while the stock market does well over "long periods" of times, I'd consider a decade to be a serious amount of time - and this has been a bad decade. Unless you had the stomach (following huge losses in 2001/2002) or simply had good timing to start following the stock market in 2003, there has simply been no easy way to make money using traditional indexes. And NASDAQ investors? Still down in a big way.

I am mulling if we have another lost decade coming in front of us - don't think it can happen? Japan has been in bear market since 1989. We are NOT Japan, but we do have some of the same bubbles/mistakes (easy money, low interest rates, housing bubble, etc). While we used to allow creative destruction in the past 3-6 months we've seemed to have shifted to a more socialistic model where losses are socialized... sort of what we criticized Japan for doing. And our structural deficits will eat our entire GDP by 2030? Not exactly a path for prosperity....


It has obviously gotten much worse since as we discussed in October [Oct 7, 2008: Bloomberg - 2000s Stock Market Worse than 1930s]

The market actually topped out 1 year ago today (S&P 500) and in that short time has lost a third of its value. Breathtaking. Bloomberg has an article updating on where we stand and it is ugly - if the decade ended now (obviously we have 2 years to go) this would be a worse decade than the Great Depression decade - the 1930s. Now, that's a stark reminder of just how awful the market has been for much of this decade. But not for everyone - just for many of those who play by the rules... I honestly wonder how Peter Lynch would handle this decade when many of the names in his book of "buy what you know" have done, at best, nothing - if not gone down precipitously.


As a curiosity I traveled over to Kiplingers.com to see how mutual funds were doing by category. The results I compiled (annualized return) are below - it is ugly. As you can see the "long only" model of 99.99% of mutual funds really are not performing any differently (as a whole) to the major index. And before you get excited by the "out performance" of the 10 year returns - let me tell you the dirty secret of the mutual fund world. Bad funds have a tendency to disappear into the ether - they are either killed or merged into better performing funds. Therefore their long term results disappear or they don't even make it to a 10 year life. Hence the median of the remaining funds goes up. Magic!


The golden age for mutual funds was in the (mostly) bull market of mid 80s to late 90s... being "long only", except for a few periods, was the way to go as people chased the ever increasing market upward. Hopefully this past decade will show mutual fund families they need to adapt and take on more sophisticated strategies to actually make their investors money or at least, cut down on some of the horrific losses. A year like 2008 will fell almost everyone who actually invests rather than trades - that's understandable. But a 10 to 15% loss can be made up in a reasonable amount of time. 40-50%? Not so much.

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