Registered Investment Advisor specializing in Model Portfolios

Nav
SNov 3, 2002

The Lessons of Really Long Term Investing

The longer the time period, the better index investing looks.

I learned this while doing a new examination of mutual fund performance. In it, I learned that the Vanguard 500 Index fund ranked 46th of the 306 domestic equity funds with 20 year track records. That means it did better than 85   percent of its competitors.

And that's only counting the surviving competitors--- some of the funds in operation twenty years ago were quietly liquidated to prevent further embarrassment to their management companies.

Twenty years is a long time.

While most of us will be investing for at least twice that long, investment data sources often treat 10 or 15 years as long term. Morningstar Reports, the Rosetta stone for a generation of investors, shows fund performance out to 15 years in its regular reports.

In a way, this isn't surprising. Only 580 of the current 8,187 domestic equity funds existed 15 years ago. In addition, the average tenure of a portfolio manager is only 3.8 years.   For most of the funds we are offered, examination of long-term performance may be either irrelevant or impossible.

The long term, however, is still what really counts. We can get to it by using some of the advanced   features of Morningstars' database.

Measured in dollars, the 12.93 percent annualized return of the Vanguard 500 Index fund (excluding any taxes) would have turned $10,000 into $113,811. Not a bad trick for being cheap and passive instead of active and clever.

The result brings up a tough question: what are the odds that anyone--- anyone--- would have been able to pick a better performing fund?

My answer: Not very good. The odds that you or I could do it, then or now, are very poor. Sadly, the odds that a commission compensated advisor could do it are worse.

This has nothing to do with competence. It has everything to do with what's on the menu. Many of the funds that did better than the index choice were no-load or low-load funds. All four of the low-load funds, for instance, were Fidelity offerings: Fidelity Select Healthcare, number 1 on the chart below with a 17.87 percent return for 20 years, Fidelity Select Financial Services, number 3 with a 16.39 percent return, Fidelity Contrafund, number 9, with 15.43 percent, and Fidelity Magellan, number 10, with 15.42 percent.

Another 23 funds were no load funds. Since they are not distributed through brokerage firms they would not have been on the "menu" of choices a registered representative could have offered.

Of the 45 domestic equity funds that did better than the Vanguard 500 Index, only 18 were load funds. So there was about a 6 percent chance (18 out of 306) that a load fund would have done better than the mother of all index funds. Those aren't very good odds.

This doesn't mean you were doomed to poor performance if you went through an advisor.   New York Venture fund, now called Davis New York Venture, had a good reputation 20 years ago and has returned 15.75 percent for the period, ranking 5th. Similarly, the American Funds group looms large on the list. Four of their funds did better than the index--- Washington Fund, 22nd at 14.16 percent; Fundamental Fund, 26th at 14.01 percent; Growth Fund, 29th at 13.94 percent; and Investment Company of America Fund, 31st at 13.84 percent. As I have pointed out many times, brokers who put their clients in these funds---and kept them in--- served their clients well.

The most important observation, however, isn't about whether funds have loads, low loads, or no load. It is about whether they are managed or passive. Enter the active management game, with or without a broker, and the odds are against you. Since we are talking about investing for retirement, not about taking a flyer on the lottery, our 'bet' should be on the choice with the best chance for success: index investing.

A rank ordered table of the long-term top 20 percent of domestic equity funds is shown below.

Tuesday: Index Investing and the Future

  
Long Term Performance--- Top 20 Percent of Domestic Equity Funds
All figures for the period ending September 30, 2002
Fund Name Morningstar Category 20 Yr ATR* 20 Yr Rank
Fidelity Sel Health Care Specialty-Health

17.87

1

Sequoia Large Value

16.70

2

Fidelity Sel Fincl Svcs Specialty-Financial

16.39

3

FPA Capital Small Value

15.96

4

Davis NY Venture A Large Blend

15.75

5

Dodge & Cox Stock Large Value

15.65

6

Liberty Acorn   Z Small Growth

15.54

7

Waddell&Reed Adv Sci A Specialty-Technology

15.47

8

Fidelity Contrafund Large Blend

15.43

9

Fidelity Magellan Large Blend

15.42

10

Mairs & Power Growth Large Blend

15.32

11

Spectra N Large Growth

15.21

12

Mutual Shares Z Mid-Cap Value

15.12

13

Legg Mason Value Prim Large Blend

15.10

14

MainStay MAP I Mid-Cap Blend

15.00

15

Mutual Qualified Z Mid-Cap Value

14.93

16

AmCent Ultra Inv Large Growth

14.50

17

CGM Capital Development Mid-Cap Value

14.35

18

Wells Fargo SIFE FinSvc A Specialty-Financial

14.29

19

Selected American Large Blend

14.26

20

Century Shares Trust Specialty-Financial

14.25

21

Amer Funds WashingtonA Large Value

14.16

22

AXP New Dimensions A Large Blend

14.10

23

Mutual Beacon Z Mid-Cap Value

14.08

24

Elfun Trusts Large Blend

14.01

25

Amer Funds Fundamen A Large Value

14.01

26

Fidelity Congress Street Large Value

14.00

27

Putnam Voyager A Large Growth

13.95

28

Amer Funds Grth Fund A Large Growth

13.94

29

AIM Constellation A Large Growth

13.90

30

Amer Funds Inv Co Am A Large Value

13.84

31

Liberty Select Value A Mid-Cap Blend

13.83

32

Waddell&Reed Adv Core A Large Blend

13.78

33

Salomon Bros Opportunity Large Value

13.63

34

Pennsylvania Mutual Inv Small Value

13.60

35

Enterprise Growth A Large Growth

13.54

36

Dodge & Cox Balanced Domestic Hybrid

13.48

37

Federated Cap Apprec A Large Blend

13.48

38

ING Corporate Leaders Tr Large Value

13.36

39

Delaware Trend A Mid-Cap Growth

13.33

40

PIMCO RCM Mid-Cap Instl Mid-Cap Growth

13.33

41

Putnam Health Sciences A Specialty-Health

13.31

42

Waddell & Reed Accumul A Large Blend

13.28

43

Vanguard Windsor Large Value

13.24

44

State St Exchange Large Blend

12.94

45

Vanguard 500 Index Large Blend

12.93

46

Eaton Vance T-M Gr 1.0 Large Blend

12.89

47

Fidelity Exchange Large Blend

12.89

48

Endowments Growth & Inc Large Value

12.88

49

Lord Abbett Affiliated A Large Value

12.86

50

Amer Funds Amcap A Large Growth

12.85

51

Vanguard Wellington Domestic Hybrid

12.81

52

Eaton Vance Lg-Cap Val A Large Value

12.78

53

Janus Large Growth

12.73

54

General Elec S&S Program Large Blend

12.73

55

Van Kampen Growth & IncA Large Value

12.73

56

Credit Suisse Sm Val A Small Value

12.71

57

Van Kampen Emerg Grth A Large Growth

12.70

58

Amer Funds Amer Mut A Large Value

12.70

59

Alliance Grth & Inc A Large Value

12.70

60

Fidelity Puritan Domestic Hybrid

12.68

61

Source: Morningstar Principia, 9/30/2002 data * Annualized Total Return
  

Filed Under: Income Investing