The purpose of this article is to reinforce how important it is to be aware of, and when necessary act on, the kind of of trends in mutual fund category performance we often discuss in these Newsletters.
More specifically, we would like to discuss how two good funds, but of completely different character, have diverged over approximately the last two years.
If you had wanted to invest in a fund which you felt, without any particular attention on your part, you would be able check up on five to 10 years later and be pleased with the performance numbers you saw, then perhaps the Vanguard 500 Index Fund would have been, and maybe still is a good choice.
But approximately two years ago, large cap stocks, including those that make up the S&P 500 Index, had been on a multi-year feeding frenzy. That was one of the reasons I began publishing these Newsletters: to advise people not to expect that this one category of funds that had done so well for year after year was necessarily the best or only place to invest in the years ahead.
In our first newsletter dated 5-13-99, I suggested that fund investors might want to begin concentrating on "small & mid cap stocks, value stocks, and foreign stocks", funds that had not performed very well over the previous years, as opposed to "an S&P 500 index fund or large growth-oriented funds/stocks such as for example Magellan". I have re-emphasized this identical point many times over nearly the last 2 years that we have been publishing.
I don't sell mutual funds or make a penny of profit as a result of the Newsletter articles I write. The suggestions we provide (unlike most others you read or hear about that often serve as a way to help to provide an income for the person making them) are merely meant to help establish our Web site as a useful place to go when someone wants informed, non-biased suggestions on how they can best attempt to accumulate assets for long-term goals such as retirement, funding your children's college education, etc.
Because what I advise in these Newsletters, also unlike many other sources, is what I myself do when investing my own money, at the time I began publication, I myself had just searched around for one or more alternatives to the large cap growth-oriented funds to begin investing in. One of the funds we hit upon was the T. Rowe Price Value Fund. This fund invests in mid cap value stocks.
Between April 5th, 1999 (just prior to our initial publication) and now, we began making somewhat regular small periodic investments into this fund. (The minimum initial investment to open is $2500 and subsequent investments must be at least $100.)
We have continued to be long-term holders of the Vanguard 500 Index Fund, going back to Jan. 1987. However, over the above period between April 1999 and the present, we only made one small additional investment into that fund since we were not convinced the previous run-up could continue.
As long-term investors, in neither case did we reduce our positions in either fund during the above period.
Now let's look at the growth in the net asset value, percentage of distributions, and then the actual growth of our two investments during this period:
T. Rowe Price Value Fund
NAV on 4-5-99: | 18.50 |
NAV on 2-16-01: | 20.17 |
Distributions: | $2.67/share, or 14.4% of initial NAV |
Return from 4-5-99 to 2-16-01: | +23.5% |
Vanguard 500 Index
NAV on 4-5-99: | 122.12 |
NAV on 2-16-01: | 120.30 |
Distributions: | $2.93/share, or 2.4% of initial NAV |
Return from 4-5-99 to 2-16-01: | +1.0% |
In terms of our actual investment gains which reflect the differing amounts we invested on various dates and the NAVs on the day of each investment (unlike above which only reflects differences between beginning and end dates), here is the true bottom line:
T. Rowe Price Value Fund
Total invested between 4-5-99 to 2-16-01: | $10,300 |
Total invested prior to 4-5-99: | $0 |
Total value of investments on 2-16-01: | $12,376 |
Profit from these investments as of 2-16-01: | $2,076 |
Total Return (annualized) as computed by Quicken: | +15.5% |
Vanguard Index 500
Total invested between 4-5-99 to 2-16-01: | $500 |
Total invested prior to 4-5-99: | $16,124 |
Total value of investments on 2-16-01: | $16,698 |
Profit from these investments as of 2-16-01: | $74 |
Total Return (annualized) as computed by Quicken: | +0.2% |
On the other hand, when we look at our long-term record with Vanguard 500 Index, we see that since our initial investment in 1-87, our total of $11,759 invested has returned to us a total of $25,909 (which includes some redemptions) for a total profit of $14,150! This represents an annualized return of 16.1% as computed by Quicken.
But over shorter stretches of time, even the best funds can stumble. As you can see, as a result of our strategy of emphasizing one of the categories of funds we thought had the greatest potential for a year or two out, we were able to enjoy a profit of over $2000 on our $10,300 investment. At the same time, we correctly invested only a fraction of our new investments in the large cap fund category. Even with the considerably larger $16,000 that we had previously accumulated in the Vanguard fund, our profit for this investment over the same period was a meager $74!
So, although over the long term, any one fund may have an excellent track record, we think that for investors who are willing to seek out the kind of trends we follow, you will often be able to enhance your investment results at certain junctures by looking elsewhere. But this is nearly impossible to do consistently unless you carefully monitor fund performance and the economic factors upon which fund performance tends to be based. Therefore, we hope that you will consult our twice a month newsletters before atttempting to do this on your own since we have had a fairly good track record at doing this.
We still continue to think that value funds such as T. Rowe Price Value will continue to do well in the months and probably the year or two ahead. However, the huge advantage in favor of these funds that existed in early 1999 as compared with the more growth-oriented funds has decreased considerably. As another reason to invest in a value fund, you may wish to further diversify your portfolio if you do not currently own one: we still recommend this as a good way to go.
There are many Web sites that can help you find good value funds. For example, try http://news.morningstar.com/List_Pages/Fund_Category_Returns/ where you can click on a fund category to get a list of the top performing funds over varying time intervals. Or consult our "model portfolio" issues for several of our favorites.
For those interested in further details on each of the above two funds, we are including the following information:
Vanguard Index 500
Morningstar Rating and Category: | 4 Stars, Large Blend |
1 yr return: | -5.1% |
5 yr return: | 16.7 |
10 yr return: | 17.3 |
% Rank in Category in 2000,1999 | 51%,39% |
For More Information: | http://www.troweprice.com |
T. Rowe Price Value Fund
Morningstar Rating and Category: | 4 Stars, Mid Cap Value |
1 yr return: | 32.7% |
5 yr return: | 17.3 |
10 yr return: | NA |
% Rank in Category in 2000,1999 | 52%,46% |
For More Information: | http://www.vanguard.com |
Tom Madell, PhD
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