This derisive term for an improbable legal defense was the first thing that came to mind when I read the article Beware Top Funds With Poor Investor Returns on Yahoo Finance, by way of The Street.com. The article takes the top-performing mutual fund of the last decade to task—not because of its returns, which were terrific—but because the typical shareholder over the last decade has been a moron.
Consider the complaint:
If you invested in Fidelity Leveraged Stock a decade ago, your total annual return would have been 14.5%. But the typical shareholder had an investor return of only 4.0%. The reason for the gap is, most investors didn’t buy and hold for the 10 years. Instead, the average dollar in the portfolio stayed invested for short periods.
Fidelity Leveraged Stock has such a poor investor return, partly because the fund is volatile. Holding shares of indebted companies, Fidelity sometimes soars in bull markets and then collapses in downturns. All too often, shareholders buy and sell at the wrong times.
Excuse me. The fund has a poor shareholder return not because the fund is volatile, but because shareholders buy and sell at the wrong times. For proof, consider the fact that investors in bond funds have holding periods that are typically just as short as equity fund investors—and they underperform by a similar amount. It’s pretty hard to blame the bond fund manager for supposedly whipping the poor investor half to death with volatility, but financial journalists try to lay this on the equity manager all the time. It is simply not true.
The article has some suggestions for investors:
Should you stay away from funds with poor investor returns? Not necessarily. But you should be aware of what you are buying. If you do buy a fund like Fidelity Leveraged Stock, keep your eyes open and be prepared for a rough ride. For investors who don’t have strong stomachs, a better choice might be a fund like Heartland Value Plus , which returned 13.8% annually during the past decade and produced an investor return of 12.0%. Because Heartland delivered a relatively steady ride, shareholders were able to hold through downturns.
The problem is that these assertions are contradicted by the evidence. For the record, Heartland Value Plus did not provide a steady ride. And you’re still going to need a strong stomach. It’s a great fund, but it had a -33.6% drawdown in 2008. That’s not because the manager is not superb-it’s because it is invested in stocks, and stocks are volatile! Very few bond funds have 33% drawdowns, but evidence shows that investors can’t hold on to them for the long run either. I might argue that Heartland has done a better job of investor education than Fidelity because they convinced their investors to stay put, but this says nothing about the great investment performance. Don’t try to blame the manager for investor performance. In fact, volatile funds with high returns can be tremendous wealth builders if investors buy the dips instead of panicking.
The truth of the matter is that investors do this to themselves, trying to get something for nothing. In their quest for the free lunch—big returns with no volatility—they discover only a stale Twinkie.
Source: www.boncherry.com
Posted by Mike Moody 
