483 / 708
The
2008
–
09
bear market made a bonfire of financials
stocks, but all the other sectors were hit fairly hard,
too. The
2000
–
02
bear market crushed tech stocks, but
other areas held up fairly well. As Kevin McDevitt
points out in the Morningstar Research article on Page
8
,
no two bear markets are the same. Kevin explains why
and what that means for building a defensive portfolio.
I’ve taken a different tack here by looking instead at
what that earlier bear market tells us about some
fund managers. The
2000
–
02
bear market has fallen
out of the standard trailing return figures now, so I
thought “Why not add them back in?” We now have
two big bear markets and two ensuing rallies to
measure when we go back to March
2000
, and I was
curious to see which funds look best when viewed
through that broad lens.
I only wanted active managers who were there at the
beginning of that first bear market. I looked at funds
by Morningstar Category versus an index fund on a
total-return basis and on a risk-adjusted basis as
measured by the Sortino ratio. Sortino isn’t too different
from the Morningstar Rating, but it does allow custom
time periods whereas the star rating stops at
10
years.
What emerged is a better picture of funds that have
delivered for investors over full market cycles. To be
sure, there are no guarantees that past is prologue, but
some solid funds rose to the top while others failed
to keep up with a comparable index fund. For many, the
path to better risk-adjusted returns was through superior
risk-reduction rather than high returns, and that’s
worth remembering this long into the current market rally.
Because I am focusing on funds with manager tenure
over the whole period, I am slightly skewing results
to the positive side as poor-performing managers are
more likely to have been fired. But I think this is a
revealing look at those fund managers who have had
the longevity to stick around.
Large Growth
So few large-growth funds are beating their bench-
mark lately that it is truly striking to see how
many large-growth funds have beaten the
Vanguard
Growth Index
VIGAX
over this time period. One key
part to that story is that the earlier bear market was a
perfect storm for large growth in general and large-
growth indexes in particular. The indexes are market-
cap-weighted, and when you have an extreme growth
rally like we saw in the late ‘
90
s, that can mean
that large-growth indexes skew heavily to overpriced
growth stocks. The ensuing bear market was pretty
much the opposite of the current environment when a
few names dominate performance in a way that
makes the benchmark very tough to beat. The common
theme among the funds that beat the index by a
significant margin is fundamentals.
All of these funds stayed focused on deep research on
company fundamentals including valuation, and
that helped stock-picking shine through. On the other
hand, funds that chased hot trends or ignored
valuation got crushed.
The Story of Two Bears
and Two Bulls
Fund Reports
5
Fidelity Mortgage Securities
T. Rowe Price Int’l Discovery
Templeton Global Bond
Morningstar Research
8
Preparing for the Next Bear Market
The Contrarian
10
Tone-Deaf Fund Companies
Red Flags
11
Technology-Investing
Underachievers
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Your RMD Questions Answered
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
The Strange Mechanics of Negative
Bond Yields
Changes to the 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel, Director of
ManagerResearch and Editor
FundInvestor
November 2016
Vol. 25 No. 3
Research and recommendatio s for the s riou fund investo
SM
Continued on Page 2