Dateline: 10/28/97
Because of my two part series on The Great Reckoning, this month's Mutual Funds Analysis is running a week late. We'll be back on schedule in November.
This past week, of course, the markets were in a tizzy because of the Hong Kong meltdown. Yesterday's record breaking drop on the Dow brought the correction to North America with a vengeance. And when I left work Monday night around 7:00 PM PST the Asian markets had been open only an hour or two and were continuing their slide. Maybe Davidson and Rees-Mogg are right after all and we're in for the biggest stock market crash in history. In spite of that, my recommendation is still "hold on tight" and ride the market through any correction or even a bear market if (and its a big if) you have your money parked in mutual funds in which you have confidence. Such confidence, as I have indicated before, should be based on the fund's historical performance, though we all know that past performance is no guarantee of future performance. If you are heavily leveraged, it may be wise to get out now though it may already be too late.
If we look at the 1987 crash, we see that yesterday's record breaking Dow plunge was only a record breaker in absolute numbers. In terms of percentages, it was only a third of the 1987 crash. And remember, in 1987 the markets recouped their losses by year end. What will happen this time is hard to tell. But bailing out now and then discovering the market has made up its losses will cost you dearly.
On Saturday, October 18th, my wife and I attended an investment conference sponsored by one of my brokers. One of the handouts that evening was a one page flyer from Templeton Funds on market timing. It displayed two charts of investments in the Templeton Growth Fund over the last 25 years. Each chart showed the cumulative total of money invested if one had invested $5000 a year from 1972 to 1996. (The total over 25 years was $125,000). Where the charts differed, however, was in the timing of the investments each year. One chart assumed the worst possible timing - when the Dow Jones Industrial Average was at its peak for the year. The second chart assumed the best possible timing - when the DJIA was at its lowest point for the year. The charts show the dates of the investments and the cumulative value of the investments at the end of each year.
What do you suppose the results were after 25 years? How much better did the accurate market timer do than the rotten market timer? Remember that the 25 year period included the bear years of 1973 and 1974. Do you think the accurate timer did twice as well as the bad timer? Three times as well? What about the average annual compound rate of return for each portfolio? Was the deviation greater than 5%, between 2% and 5% or less than 2%?
The answers will astound you. The cumulative value of the good timer's portfolio after 25 years was a staggering $1,719,702. And what about the poor slob who had the rotten luck to mistime each annual investment? Well, he wasn't such a poor slob after all. His portfolio accumulated to a staggering $1,427,872! Yes, even the worst possible performance of people who consistently added $5000 a year to their Templeton investment ended up with almost a million and a half dollars. Fully 83% as much as the person who had horseshoes up his butt. (And nobody is that good a market timer!)
Annual average compound rate of return? The accurate timer had an average annual return of 18%. The schmuck had 16.9%! You read that right. The deviation between absolutely accurate timing and absolutely atrocious timing was a measly 1.1%. And if someone were to follow the practice of dollar cost averaging, he would be somewhere between the two levels of performance with a likely deviation of less than half a percent. If this isn't enough to persuade people of the folly of trying to time the market, I don't know what is.
| Great Timer's Portfolio | Lousy Timer's Portfolio | ||
| Value of Account | Rate of Return | Value of Account | Rate of Return |
| $1,719,702 | 18.0% | $1,427,872 | 16.9% |
Looking now at the Monthly Mutual Fund Performance Charts as compiled by both the Vancouver Sun and the Globe and Mail, we find that our list of Power Performers (funds that performed better than 20% annual compound rate of return in each of 1 year, 2 year, 3 year and 5 year periods) swelled from 25 last month to 39 this month. (See chart.) The number of Canadian Equity Funds and American Equity Funds meeting our criteria increased from 12 to 17 and 13 to 18 respectively. Last month no other categories were represented. This month three Dividend funds made the grade, Industrial Dividend Growth, Maxxum Dividend and PH&N Dividend Income, as well as one Resource Fund, the 20/20 Canadian Resources Fund from AGF.
This month's listing has four funds from Philips, Hager & North, three from AGF and two each from AIC, Bissett, Cote 100, GBC, McLean Budden, Saxon and Spectrum United.
As with last month, let's look at the top performing funds over ten years. We were seeing if any matched Warren Buffett's target of 15% annual compounded growth for his Berkshire Hathaway company. Last month two made the grade and they repeated this month - Marathon Equity topping the list at 19.9% return, followed closely by AIC Advantage at 19.8%. This month PH&N's US Pooled Pension Fund joined the list with a 15.6% annual compounded rate of return over ten years. Following very close behind were the Sceptre Equity Fund and the PH&N Vintage Fund at 14.9% each, the Trimark Fund at 14.8%, McLean Budden's Pooled American Equity Fund at 14.5% and the Spectrum United American Growth Fund at 14.2%. All other funds were below 14%.(See chart.)
On another note, when the Hang Seng (Hong Kong) Index fell 10% last week, the mutual funds that did the best and the worst that day were the Global Manager Hong Kong Bear Fund which gained about 15% and the Global Manager Hong Kong Geared Fund which dropped almost 20%. In fact, Global Manager Funds dominated the top five gainers and losers that day.
I often wondered about these Global Manager Funds over the last year as they were relative newcomers and always seemed to appear as best and worst performers in various categories, especially for one month performance. But I couldn't find out anything about them on the Internet. So I recently asked my broker about them. He tells me they are owned by the Bank of Bermuda and are an offshore fund offered in Canada. Geared means leveraged and that is why the geared funds do spectacularly well when they are hot and very poorly when markets tumble. The Global Manager bear funds are heavily engaged in short selling and in investments that benefit from a bear market. Not only are these very volatile funds not for the faint of heart, they are not for shallow pockets. Minimum investment in the Global Manager Funds is $150,000.
Next Week's Feature: At that investment conference that my wife and I attended, one of the presentations was about a tax shelter investment in cranberry farming. I'm seeing my broker this morning to take a closer look at this limited partnership and will report on it next week.