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Morningstar FundInvestor
May 20
16
or standard deviation. The story is quite simple.
More volatility means more-extreme performance
that triggers fear and greed. Boring funds are often
a better bet for the typical investor.
Lessons From Fund Investor Returns
Let’s take two relatively conservative funds.
Royce
Special Equity
RYSEX
has
6
.
6%
annualized
10
-year
total returns through the first quarter of
2016
. But its
investor returns are an impressive
8
.
3%
, meaning
investors got the most out of the fund.
Franklin Mutual
Beacon
TEBIX
has
10
-year returns of
4%
annualized—
not as good as Royce Special, but
OK
. However, its
investors only earned
0
.
5%
annualized returns over
the
10
-year period, thus leading to a huge gulf between
the two shareholder bases. The explanation can be
found in
2008
. That year, Franklin Mutual Beacon lost
40%
, while Royce Special Equity only lost
20%
. So,
not only did Franklin Mutual Beacon lose more than
the market but it also likely disappointed shareholders
who expected it to have some defensive qualities.
(Other Mutual Series funds held up better.) As a
result, money poured out of Franklin Mutual Beacon
in
2008
–
10
while Royce Special Equity got inflows,
meaning shareholders were there for the big rally that
started in March
2009
. In addition, Royce Special
Equity has closed to new investors from time to time,
and this helps to keep investors from buying at
the worst time while also keeping hot money out.
Franklin Mutual Beacon is a decent fund that just
happened to be leaning the wrong way on financials
and distressed investing in
2008
. While the example
does illustrate some of Royce Special Equity’s appeal,
I doubt shareholders will actually beat stated returns
the next decade. In fact, recent outflows mean the fund
would have to go down from here in order for that
to happen.
We can also draw some lessons from
Fidelity Tax-
Free Bond
FTABX
. The fund’s
10
-year return of
5
.
05%
annualized falls to
3
.
72%
on an investor return basis,
yet it still has investor returns in the top
4%
of its
Morningstar Category. The fund has a Morningstar
Analyst Rating of Gold, and it is clear that investors
have been well-served by the fund. Yet when they do
get out, timing isn’t great. The fund had outflows
in early
2011
because of weak returns and Whitney’s
doomsday call, but that turned out to be a great
year, with a nearly
11%
return. The story is similar for
Vanguard Intermediate-Term Tax-Exempt
VWITX
,
where investor returns were strong but lagged total
returns by
1
.
1%
. Both funds are well-run and easy
to understand, but skittish shareholders cost them-
selves some money.
Lessons
This illustrates the importance of sticking to your
investment plan on a fund level and on an asset-
allocation level. If we stick to our guns and avoid
getting too excited by rallies or worried by bad
news, we’ll make the most of our funds. Under-
standing your investments and their role in your
plan can help you make the right decisions. Quarterly
checkups on your portfolio will also help, as you
won’t feel overwhelmed when markets go south.
Informed and patient investors are the ones who
will most easily reach their goals.
K
Franklin Mutual Beacon Fund
Data as of 03/31/2016.
p
Total Return (%)
p
Flow
1,800
1,080
360
-360
-1,060
50
30
10
-10
-30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
p
Total Return (%)
p
Flow
1,800
1,080
360
-360
-1,060
50
30
10
-10
-30
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Good Timing, Bad Timing. Yearly Flows and Returns for Two Funds
Royce Special Equity Fund