Actively managed mutual fundshave always had a tough time
matching up with their index-fund rivals. Now, just as things
were looking up for active funds, one study questions whether
even those that manage to beat their benchmarks are worth the
risk they take.
Risk-adjusted returns
At first glance, a recent study conducted by
Morningstar appears to have some positive news for active
funds. The study found that over the past three years,
roughly half of all active funds succeeded in outperforming
whichever Morningstar index most closely resembles their
investment objective.
However, those figures only take into account
absolute returns, without adjusting for the amount of
risk that
fund managerstook in generating those returns. Once you
consider the extra risk that some managers needed in order to
boost performance, the study found that as few as 37% of
funds had better risk-adjusted returns than their benchmark
index.
Going beyond the average
The real question for fund investors, though, is how to
find those funds that
willmanage to
beat their benchmarkseven on a risk-adjusted basis. The
study points to outperformance among funds with more assets
under management, as well as higher levels of cash.
As an example, the study pointed to one strong-performing
fund,
Tweedy Browne Value (TWEBX). A quick look
shows the fund to appear to be a typical conservative value
fund, with blue-chip holdings that include
Johnson & Johnson (NYSE: JNJ),
Wal-Mart Stores (NYSE: WMT), and
Philip Morris International (NYSE: PM).
Moreover, it performed relatively badly during the bull
market, finishing consistently in the bottom 20% of its
category from 2003 to 2006.
Yet the Tweedy Browne fund's ability to preserve
investors' capital during the 2008 bear market not only
showed the flip side of its low-risk approach but also
vaulted it toward the top of its category both in 2008 and
over the past three years. Its low risk rating makes its
strong performance all the more remarkable.
Searching for better funds
You can find a number of other mutual funds that meet
similar criteria. Here are three low-risk funds that have
done well:
Fund
5-Year Average Annual Return
Risk Rating
Holdings Include ...
Forester Value (FVALX)
3.9%
Low
Microsoft (Nasdaq: MSFT),
3M
Vanguard Dividend Growth (VDIGX)
4.2%
Low Continued... |