As banks are now learning the hard way, relying on past performance to predict future returns can be a recipe for disaster. If mortgage default rates remained at the levels of the past, all the no-money-down lending made in recent years wouldn't be causing a financial calamity today. The same is true for investing in mutual funds. What has worked in the past often doesn't work in the present. As a fund investor, you have to be very careful you are not loading up on yesterday's good ideas. Unfortunately, fund rating and ranking systems tend to have the opposite affect: they direct you into yesterday's winners.
A current article on TheStreet.com titled "Five Perpetually Winning Mutual Funds" shines a spotlight on five funds that TheStreet's rating system has given highest marks to for the last two years.
In the first table below are the "Perpetual A+ Winners" -- the five funds with two years of continuous A+ ratings. Especially with the recent market turmoil, it is not easy to outperform 96% of the open-end fund universe for 24 month in a row."
Everybody loves a winner. Unfortunately these five fund will all very likely underperform the S&P 500 over the next few years.
The main problem is that this list of winners is really just the best performing funds in a fund category that has happened to beat most other funds over the last eight years - foreign funds that are more value than growth. If TheStreet had created this list in 2000, they would have wound up with five large cap U.S. stock funds with a heavy growth bend. Janus, PBHG, and Firsthand funds would probably have dominated the list.
Rating funds based on how they do against all funds in general is very dangerous. Morningstar learned this the hard way when they dolled out five star ratings to just about every U.S. large cap growth and tech fund manager with a pulse in 2000 while slamming foreign and small cap value funds. Morningstar eventually started doing things a little more like MAXfunds has since 1999 - comparing each mutual fund to similar funds (though they do not consider fees, fund size, category valuations among other things we consider). Clearly TheStreet.com is still using this old fashioned fund rating methodology.
If you think the next few years will be more of the same - a sharply falling U.S. dollar and European stocks clobbering U.S. stocks, these funds are for you. You certainly won't be alone in your decision - this is how most fund investors are allocating their money to funds these days. Our guess is it is many of the people who overloaded on tech and growth funds in 2000.
Let Bygones Be Bygones
As banks are now learning the hard way, relying on past performance to predict future returns can be a recipe for disaster. If mortgage default rates remained at the levels of the past, all the no-money-down lending made in recent years wouldn't be causing a financial calamity today. The same is true for investing in mutual funds. What has worked in the past often doesn't work in the present. As a fund investor, you have to be very careful you are not loading up on yesterday's good ideas. Unfortunately, fund rating and ranking systems tend to have the opposite affect: they direct you into yesterday's winners.
A current article on TheStreet.com titled "Five Perpetually Winning Mutual Funds" shines a spotlight on five funds that TheStreet's rating system has given highest marks to for the last two years.
In the first table below are the "Perpetual A+ Winners" -- the five funds with two years of continuous A+ ratings. Especially with the recent market turmoil, it is not easy to outperform 96% of the open-end fund universe for 24 month in a row."
The "A+" funds in question are:
AIM European Growth A (AEDAX)
JPMorgan International Value A (JFEAX)
Franklin Mutual European A (TEMIX)
DFA International Value IV (DFVFX)
Dodge & Cox International Stock (DODFX)
Everybody loves a winner. Unfortunately these five fund will all very likely underperform the S&P 500 over the next few years.
The main problem is that this list of winners is really just the best performing funds in a fund category that has happened to beat most other funds over the last eight years - foreign funds that are more value than growth. If TheStreet had created this list in 2000, they would have wound up with five large cap U.S. stock funds with a heavy growth bend. Janus, PBHG, and Firsthand funds would probably have dominated the list.
Rating funds based on how they do against all funds in general is very dangerous. Morningstar learned this the hard way when they dolled out five star ratings to just about every U.S. large cap growth and tech fund manager with a pulse in 2000 while slamming foreign and small cap value funds. Morningstar eventually started doing things a little more like MAXfunds has since 1999 - comparing each mutual fund to similar funds (though they do not consider fees, fund size, category valuations among other things we consider). Clearly TheStreet.com is still using this old fashioned fund rating methodology.
If you think the next few years will be more of the same - a sharply falling U.S. dollar and European stocks clobbering U.S. stocks, these funds are for you. You certainly won't be alone in your decision - this is how most fund investors are allocating their money to funds these days. Our guess is it is many of the people who overloaded on tech and growth funds in 2000.
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