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这是互惠基金必读教材-How to avoid from the bad fund: Dirty Dozen

(2006-09-10 07:37:36) 下一个

The buy-and-hold Dirty Dozen

Sometimes it's better to take your profits out of certain mutual funds, ROB CARRICK writes

Saturday, September 9, 2006

Remember the CIBC Far East Prosperity Fund when you next hear an investment industry type try to lull you into passivity with talk about buy-and-hold investing.

This fund lost a compound average annual 0.98 per cent over the 10 years to July 31, which would have burned a $5,000 investment down to $4,531. If you owned the average Canadian money market fund over the same period, you could have turned the same $5,000 investment into $6,610 and never worried for a second about losing money.

Trading in and out of mutual funds or stocks is a quick and easy way to ensure you get rotten investing results. But never assume that buying something and holding it indefinitely is the best alternative.

To make this point, the Portfolio Strategy column presents a Dirty Dozen mutual funds list with atrocious long-term records, including CIBC Far East Prosperity. People may have made money in these 12 funds by holding for a limited time frame, and some of these funds are doing fine at the moment. But a long-term buy-and-hold strategy would have been a colossal error.

There are several worthwhile reasons for examining these mutual funds, the most basic of which is to show the importance of being very selective about the funds to which you give your long-term loyalty. The other reasons relate to the way in which the dirty dozen funds illustrate some important rules of mutual fund investing, including the hazards of investing in risky sectors such as technology and Asia or Pacific Rim funds.

To be selected for the Dirty Dozen list, a fund must have:

Significant size, with $100-million in assets being the minimum level of assets required for inclusion.

A compound average annual return for the 10 years ended July 31 that is well below average.

10-year returns that are at least half a percentage point less than the 2.8-per-cent annual gains an investor could have made in a risk-free money market fund.

The funds comprising the Dirty Dozen have a total of $2.8-billion invested and come from all over the map, with the exception of Canada.

With the S&P/TSX composite index on a multiyear roll, the worst annualized 10-year return from a decent-sized Canadian equity fund is the 5.7 per cent delivered by Altamira Equity. That's feeble, but it's not bad enough for membership in the Dirty Dozen.

Four of these 12 funds were niche products, which offer outsized risk and return potential by taking a narrow focus on a particular region, sector or strategy. Two of the funds, including CIBC Far East Prosperity, are in one of the Asian equity categories, one is a science and technology fund and another is an alternative strategies fund.

Here, we arrive at the first lesson offered to investors by the Dirty Dozen. There are some fund sectors, notably Asia and tech, that are so fraught with risk that you can hold them for 10 years and still lose money in the end. Do you really need to have these funds in your portfolio? The correct answer for conservative investors is No.

More aggressive investors will certainly be tempted, though. It happens that Asia funds have averaged about 13.4 per cent annually in the past three years, and the category has made average gains of as much as 87 per cent in a single year (it has also lost money on average in six of the past 15 years). Want to try your hand at capturing the undeniable upside potential in the Asian market? Then consider the second Dirty Dozen rule, which is to think like a stock trader when you buy a volatile sector fund.

Instead of taking a buy-and-hold approach, consider how much downside you're willing to tolerate and what size of gain would make you happy. Then, map out a floor price where you'll protect yourself from major losses, and a ceiling price where you'll sell at least some of your holdings to lock in gains.

Say you were a unitholder of CIBC Far East Prosperity in 1999, when it made 53 per cent (the average fund made 83.6 per cent, but never mind). If you'd taken at least some profits at the end of the year, you'd have saved yourself from three money-losing years in a row.

The third Dirty Dozen rule is to understand that while fees are vitally important in general when choosing funds, they tell you nothing about whether a fund is going to be a long-term fiasco for you as a unitholder. Fact is, very expensive and very cheap funds made the Dirty Dozen list, and most were at or below their category averages.

AGF Managed Futures, which lost an average 14.6 per cent over the past 10 years, has a beyond-bloated MER of 4.11 per cent (note: this fund does not have the required $100-million in assets to make the Dirty Dozen list, but its 10-year numbers were so bad that it just had to be included, anyway).

And then there's Phillips Hager & North U.S. Equity, with its laudably frugal MER of 1.15 per cent. This fund averaged just 2.1 per cent a year over the past decade, less than half the average fund in the same category.

The fourth Dirty Dozen rule is to avoid being suckered into buying a particular fund just because it's offered by a company that has done very well for you in other areas. TD U.S. Equity is a perfect example.

The company behind this fund, TD Asset Management, has some very strong funds in the bond and Canadian equity areas, but its efforts outside Canada are weak. Still, if you were a happy TD client over all, you might conceivably decide to diversify your portfolio with some American content using TD U.S. Equity. If you did that 10 years ago, however, a $5,000 investment would have grown only to $6,030, which is much less than what the average U.S. equity fund would have made and a fair bit worse than a risk-free money market fund.

The fifth and most important Dirty Dozen rule is to never buy a fund and blindly hold it indefinitely, whether it's an up-and-down sector fund or bedrock Canadian, U.S. or global equity fund.

Chronically underperforming mutual funds can undo careful financial planning done by you or your investment adviser. Achieving the investment returns you'll need to generate sufficient retirement savings is hard enough without owning funds such as Trimark Discovery, which lost an average 0.69 per cent a year over the past decade.

As the Dirty Dozen list shows, it's not just flakey sector funds that reward unitholders for 10 years of loyalty with little or no gains. BMO International Equity bestowed average annual gains of 0.67 per cent over the past 10 years, while Scotia Global Growth gained 1.11 per cent.

If you think this is an isolated problem, there is a total of 30 funds from categories such as Canadian, U.S. and global equity, natural resource, Asia Pacific Rim, science and technology that were underwater for the 10 years to July 31. Another 11 equity funds had returns of less than 1 per cent annually.

These funds have paid themselves all along by charging management fees, but they've been costly for buy-and-hold customers either in terms of lost money or lost opportunity to make decent returns in better funds.

All you need to know about buy-and-hold investing is that it applies only to the best funds -- the ones that are consistently above average, that don't expose you to big risks in order to make a big score, that have demonstrated an ability to survive bear markets without too much pain and that charge a fair price. If you're unlucky or negligent enough to have bought lesser funds, the strategy is to flee, not hold.

The Dirty dozen

Here are 12 equity funds that were brutal on unitholders who held on over the past 10 years. Each was chosen for the list because it either lost money over this period, or delivered returns that were well below average and less than a risk-free money market fund.

Fund (as of July 31, 2006) Asset class Assets ($-millions) MER % 10 year %
AGF Managed FuturesAlternative strategies44.11-14.57
AIC World EquityInternational equity116.12.432.11
BMO International EquityInternational equity641.32.490.67
CI Global BondForeign bond272.92.061.94
CIBC Far East ProsperityAsian or Pacific Rim equity208.52.87-0.98
Investors Pacific International-AAsia ex-Japan equity198.62.87-1.92
National Bank Global BondForeign bond259.42.111.7
PH&N U.S. Equity-AU.S. equity3731.152.05
RBC U.S. Mid-Cap EquityU.S. small and mid-cap equity158.32.132.18
Scotia Global GrowthGlobal equity109.52.561.11
TD U.S. EquityU.S. equity347.42.471.89
Trimark DiscoveryScience and technology130.42.91-0.69

SOURCE: GLOBEINVESTORGOLD.COM

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