(PUB) Investing 2016

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May 20 16

Morningstar FundInvestor

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

Good Timing, Bad Timing. Yearly Flows and Returns for Two Funds Royce Special Equity Fund

p Total Return (%)

p Flow 1,800

1,080

360

-10

-360

-30

-1,060

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Franklin Mutual Beacon Fund