Bad funds today, stars tomorrow!

Over decades, I’ve been quoted in newspapers and television (and have also made dozens of presentations to various professional groups) suggesting that bad funds (defined as those with miserable track records at present, or dogs) offer the best potential for excessive favorable returns going forward. Finally, one of my favorite columnists at the Toronto (Ontario, Canada) Globe & Mail, Shirley Won published a table that illustrates the point nicely. I recall asking her team years ago to do this exercize, and am thrilled at the results. (if you click on the below image, you’ll see a larger and clearer version of the scan).

Just for your information, I was CEO (and founder) of Mavrix Funds, although the funds listed as “Mavrix Sierra” and “Mavrix Growth” have different names now (we sold the fund company to Matrix). Looks like if you buy a dog, it will turn into a star pretty quick. I can’t count how many times I’ve researched the phenomenon – but here’s the result of one of my very earliest efforts (copied from chapter in my recent book, A Maverick Investor’s Guidebook).

This graph shows just one of the funds (not much in the way of databases or computer power back then) over time as it rises and falls in the rankings. However, I managed to fit every fund in a sample of many to this same pattern. Here is a direct quote from my book:

It doesn’t take a mathematician to interpret a picture. If you invest in the fund when it’s a dog, the odds are great that it will be a top performer soon enough. The problem is that most investors will pick a top performer, often with the help of their advisor, who is just human and knows it’s easier to get you to buy into a good performer than a bad one. However, the top performer will soon become a dog, and the investor will be unhappy.

A smart person will quickly identity that if a dog fund has declined by 50%, it will have to rebound 100% just to get even. BUT I’m not suggesting you buy any fund and just hold on to it. Why?

  • buy and hold sucks as a strategy (holders of Italian bonds might agree)
  • a manager change might screw things up for you

You have to BUY the fund when the track record is horrific, but also SELL it once you’re satisfied that you’ve made enough of return to make you happy (don’t be greedy). One year later, or maybe three years you should find another dog to buy ….. don’t hang in there so long that the tide turns against the portfolio manager’s style yet again.

Many of my friends have lost their jobs because of pressure to “FIX” a fund’s performance by unhappy investors, bad publicity (I’ve had my share) or because there’s new company management. We portfolio managers make convenient scapegoats. In order to buy-low/sell-high it’s important the same portfolio manager who was burdened with the lousy past performance, is allowed to continue doing whatever it is that he does. If he’s been replaced, then find another fund to consider.

So when my darling wife asked me what she should invest her retirement savings funds in, out of the below three choices:

  • GIC
  • Balanced Fund
  • Growth Fund

you can be sure I recommended the least favored (by her or her advisor) on the list. Of course, if you read some of my prior postings you’ll know I have many other reasons to prefer a growth fund today; especially one with a loud bark (as in woof, woof…a dog).

And just to illustrate I’m not taking advantage of ‘hindsight’ the below was published last year:

Mal Spooner quietly leaves Mavrix

Shirley Won — Investment Funds Reporter

Posted on Monday, May 10, 2010 1:15PM EDT

A game of musical chairs is being played out at Mavrix Fund Management.

Malvin (Mal) Spooner has left the small fund company he co-founded a decade ago, but the departure was announced in a low-key way through a press release that came out on Sunday. (Does someone think that no one will read it on the weekend?)

The departure of the chief executive officer, who is also well known on Bay Street for raising money for charity through rock-and-roll events, comes as little surprise given that GrowthWorks Ltd. bought publicly traded Mavrix last year…….

(I edited out some superfluous stuff, but what comes next is the beef...)

Mr. Spooner, as many folks on Bay Street know, doesn’t fit the mould of a conventional fund company executive. He can be surprisingly frank. In December, he said he was no advocate of buy and hold. “Put money into a fund that is performing poorly,” he advised. “When it has made you some good money, move along.”

What about the long term? “All bunk,” he said. “If you take your money out, then the firm loses revenue [management fees]…Buy and hold makes sense from a business perspective.”

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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4 Responses to Bad funds today, stars tomorrow!

  1. Hi Mal, is this just a matter of reversion to the mean?

    • Mal Spooner says:

      Good question. I believe it’s more than that…various styles, sectors and companies have rhythms tied to business cycles. Over time the charactistics of cycles change causing some styles to become less relevant, more or less volatile etc. so the answer is YES but subject to constant monitoring for such changes. Timing (or reversion) depends on so many variables…can take months or many years for different funds (assuming style is held constant). Hope this helps!

  2. Pingback: GOLD? How to avoid BAD timing! | Maverick Investors Rally Site

  3. Pingback: GOLD? How to avoid BAD timing! | www.traderstouch.com

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