This morning's Wall Street Journal contains a mildly interesting piece on mutual funds that have recently re-opened after closing to new investors at some point in the last few years.
"By closing a fund to new investors," writes the Journal's Shefali Anand, "management is in effect putting shareholder benefit above its near-term profits." That's true enough, and it's worth noting.
But there's another reality on display in this story, one that's more relevant to investor decision-making: The tendency for mutual funds to outperform in one period and underperform in the next. Here's Anand:
Four years ago, the top-performing Hotchkis & Wiley Large Cap Value fund shut its doors to new investors. The mutual fund had beaten at least 97% of its peers for three consecutive years through 2004.
Then last year, the fund collapsed, falling behind 95% of its peers. Its assets fell to a fourth of the fund's peak. Now, it's once again welcoming new investors.
Consistent management by itself is no guarantee. Consider Hotchkis & Wiley Large Cap Value, which closed in July 2005 and went into decline soon thereafter. One of the managers, Sheldon Lieberman, has been with the fund since 1997. Yet every calendar year since 2006, it has returned less than the Standard & Poor's 500-stock index and has been among the worst performers in its large-cap value category.
In 2008, it fell 47%, due to large stakes in financial stocks such as Freddie Mac (FRE) and Washington Mutual Inc. The fund's 10-year return through Feb. 28 was an annualized negative 1.7%, lower than the category average. The fund's managers declined to comment.
This is just good old-fashioned mean-reversion, and it's one of the more reassuring regularities of our world.
The point here isn't about the opening and closing of funds. It's about the very bad practice of chasing performance, which often characterizes the "service" provided to individual investors and retirement plans by our industry's army of salespeople. It's a loser's game, one we'll decline to play as long as we're in the business.
Shefali Anand, "Exclusive Funds Are Clamoring For Your Money," Wall Street Journal, March 31, 2009