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March 4, 2012, 12:01 p.m. EST

Funds’ all-time highs don’t come all the time

Commentary: Expect the best from managers, but tough out the worst

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By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) — When a mutual fund trades at its all-time high, it means the manager has the right stuff, proven by the fact that every single shareholder is in the black.

But you wouldn’t want a manager to brag about it.

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Investors: Count your blessings

WSJ's 'Intelligent Investor' Jason Zweig makes a stop on Mean Street with the message that in light of the recent run in stock prices, investors should be grateful for what they’ve got. Photo: AP.

Aside from the bad karma, managers who pat themselves on the back for good performance are taking their eyes off the ball, probably at a point where the market is about to reach out and knock them off their peak.

So when I saw one manager’s recent commentary with a headline that his firm’s domestic stock funds were at record highs, it made me cringe.

Except the author of the commentary, Bill Nygren of Oakmark /zigman2/quotes/203815081/realtime OAKMX +1.05%  and Oakmark Select /zigman2/quotes/207233272/realtime OAKLX +1.08%  funds, is not your ordinary fund manager, and his point also was far from ordinary. Read Nygren’s letter to shareholders.

True values

In a world that is compulsive about minute-by-minute performance, it’s actually investors who have taken their eyes off the ball. They measure performance from the top — meaning that any dollar setback from the maximum feels like a loss — and against benchmarks that have no bearing on their wealth.

The more a fund deviates from its benchmark, the more it is shunned by investment advisers and a big swath of the public, which typically means that managers need to run their issues with an eye on how far they are straying from an index, rather than with both eyes on doing what they think is best for shareholders.

“You really can’t hold equities unless you are willing to accept the volatility that comes with it,” Nygren said in a telephone interview, “and when you tell people how attractive the equity market is right now, they tell you ‘I want the upside, but I can’t accept any loss.’ They want long-term certainty of the outcome, and they aren’t willing to accept that most of the time your fund is not going to be at an all-time high.”
Read more: Why dividend stocks top TIPS for income investors.

That’s particularly true for someone like Nygren, whose fund takes a value approach — trying to buy stocks at a discount to his estimate of their worth — that can fall out of favor in the market for long stretches of time.

“Highly acclaimed long-term value investors … all go through some time period where they are wrong on their research thoughts and their returns are poor,” Nygren said, “and we have not been immune to that.

“There isn’t a recipe for creating consistent outperformance of the market,” he added. “Any strategy that is successful long-term involves significant periods where it’s not doing well, where the results are down — or at the very least inconsistent — and you stick with it because you have confidence that they will get back to set a new all-time high, and you have the time to wait for that recovery.”

Nygren — whose funds have been in the top 25% of their peer group for one-, three-, five-, 10- and 15-year time periods, according to investment researcher Morningstar Inc. — thinks stocks are more attractive than bonds thanks to balance sheets that are low in debt and high in cash, price/earnings ratios that are below historic norms, and dividend payouts that have room to grow.

While that would bode well for equity investors over the next decade — which Nygren thinks will be markedly stronger for stocks than the last 10 years — there’s enough market turmoil and uncertainty to create a bumpy ride.

Finishing touch

Here’s where investors need to keep their goals in mind and ignore short-term performance and paper profits.

“The industry is all about tracking error and basis points and where a fund is compared to an index,” Nygren said, “but most mutual fund investors are using funds to meet real-world future expenses. Their risk isn’t that they have a fund that is a few basis points off, it’s that they lose capital and don’t have a chance to recover it before they need that money.

“Performance records aren’t just a sheet of quantitative statistics; they translate to real dollars that real people are using to meet real expenses.”

The important thing to remember is not whether your funds have made an all-time high — which is the manager’s ultimate job — but whether they can deliver the returns you need to pay future bills.

Your worry should be whether the fund’s next all-time high is at a point that allows you to reach your goals when its’ time to convert those fund shares into cash.

US : U.S.: Nasdaq
$ 105.94
+1.10 +1.05%
Volume: 0.00
March 20, 2023
US : U.S.: Nasdaq
$ 51.27
+0.55 +1.08%
Volume: 0.00
March 20, 2023

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.

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Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund...

Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, “Getting Started in Hiring Financial Advisors,” was published in the spring of 2010 by John Wiley & Sons.

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