Investors of the Hartford Capital Appreciation (IHCAX) mutual fund should reduce their holdings and transition into low cost exchange-traded funds like SPDR S&P 500 (SPY) or SPDR Dow Jones Industrial Average (DIA) for large cap blend exposure. Its past returns were great, but rather than wait for lightning to strike twice investors should wait out their load fees and move on.
The Hartford Capital Appreciation (IHCAX) mutual fund has had a great run, making it one of the most popular mutual funds. As a large cap blend fund it dramatically outperformed its benchmark, the S&P500 as well as its peers from 2003 through 2007. With $12.4 billion in assets under management, it is closed to new investors. In light of such success, who could ask for more?
Rational investors should ask for more. The reality of mutual fund performance is that past success is not predictive of future success. Instead, mutual fund performance is mostly random and whatever observable performance persistence is seen among extreme losers, not winners.
Specifically, rational investors should ask, "What have you done for me lately?" IHCAX charges a 1.95% expense rate. It also saddles investors with overweight exposure to large cap stocks with precarious financial strength:
Chesapeake Energy Corporation
Delta Air Lines Inc.
Ford Motor Co.
General Electric Company
Kraft Foods Inc.
United Continental Holdings, Inc.
None of these firms score as "safe" according to the Altman Z-score and they account for 16.86% of portfolio value.
Moreover, lHCAX has a high weight on the financial sector:
Hartford Capital Appreciation
SPDR S&P 500
SPDR Dow Jones Industrial Average
This reliance on financials is difficult to accept because the risks of financial companies are hard to benchmark. (For example, they defy credit scoring using the Altman Z-score.) Investors who insist on active management should look for funds that engage in individual stock picking over funds that pick sectors. Moreover, they should be skeptical of funds with high expense ratios: a fee is a guaranteed negative alpha hit to your portfolio!