When Losers Laugh At Active Mutual Fund Managers

Nearly one year ago, I asked readers to come up with a list of the best mutual funds they could. 

And they didn’t fail me—coming up with a list of 10 beauties.

Then I asked readers to give me names of the worst stocks they knew:  stocks destined to fall through the Earth.

Keep in mind that one person’s dream fund or stock could always be another person’s pariah.

That said, once I collected the names of the dream mutual funds and the terrible stocks, I hypothesized that over a long period of time, the loser stocks would likely beat the aggregate results of the top-rated mutual funds.

Why would I do that? 

Don’t I know that some of the smartest minds in the business are running these funds?  Yes, I do know that.  But I also know that the stock market is tough to predict, and it’s highly efficient.  If a stock has poor prospects, it’s likely going to be priced cheaply.  And if its reputation reverses, we could see some serious gains.

First of all, it’s no surprise that Vanguard’s total stock market index fund has beaten 8/10 of these mutual funds over the past 10 months.  That’s mathematically inevitable over the long haul.  And over the short term, you’ll still very likely see that trend (as we see here, since April 14, 2010)  With the index up 11.3%, we see that only “Fidelity Select Energy” and “American Heritage Century A” have beaten the market over the past 10 months.  Eighty percent of these fund managers would have lost to monkeys throwing darts at a newspaper stock market page.

Selected Super Funds
Wednesday February 16, 2011 02:45 AM EST

Company Name

Cost

Current Value

Gain / Loss

Gain / Loss %

Today’s Gain/Loss

Cash   

$196.04

     
Realized Gain / Loss     

+$4,691.45

   
Total  

$557,713.97

+$57,713.97

11.54%

-$1,772.58

           

American Funds Mut;A

$25.88

$45,834.77

+$774.15

1.72%

-$87.07

Amer Cent:Hertge;A

$18.47

$62,735.04

+$9,860.90

18.65%

-$486.54

Dodge & Cox Stock

$104.49

$55,819.04

+$5,417.38

10.75%

-$4.82

FMI:Large Cap

$15.19

$54,113.79

+$3,662.02

7.26%

-$199.31

Fidelity Puritan

$16.99

$55,932.91

+$5,119.89

10.08%

-$119.64

Fidelity Sel Energy

$45.59

$64,536.60

+$14,271.96

28.39%

-$628.39

LM CM Value Trust;A

$39.72

$53,288.88

+$3,321.12

6.65%

-$50.32

American Funds NWld;A

$52.59

$54,309.94

+$692.49

1.29%

-$30.59

T Rowe Price Eq Inc

$22.98

$55,315.76

+$4,571.99

9.01%

-$198.74

Sound Shore

$30.62

$55,631.21

+$5,330.61

10.60%

+$32.85

But that’s never going to be considered news to the well-read investor.

What’s interesting, and a prologue of what’s to come (I believe) is that 4/10 of these mutual funds are losing to the terrible stocks my readers compiled. 

Let’s be clear about the purpose here. 

My readers were trying to pick the worst stocks they could think of—stocks they felt would tank badly. 

And these mutual fund managers were doing their best to beat the market.  In many cases, they are paid millions of dollars to do so.  In a taxable account, 5/10 of these funds would be losing to the “loser stocks” because the portfolio turnover in the T. Rowe Price Equity Fund would create a drag that wouldn’t be offset by its 0.91% advantage over the loser stocks—ensuring that it joined the other 4 underperforming funds.

So half of these fund managers are doing their best in race where the competitors (the loser stocks) are actually trying to run in the opposite direction. 

Hmmmm…it does make you think, doesn’t it?

I’m standing by my hypothesis that over many years, without changing these portfolios, the loser stocks will pull far ahead of the aggregate returns of these super mutual funds.  Time is the enemy of the fees they will generate internally.  And fees are forever.

23 loser stocks
Wednesday February 16, 2011 02:46 AM EST

Company Name

Cost

Current Value

Gain / Loss

Gain / Loss %

Today’s Gain/Loss

 Cash  

-$6,173.30

     
 Realized Gain / Loss    

+$5,594.76

   

Total

 

$532,113.03

+$39,855.91

8.10%

-$1,950.86

           

Alcoa Inc.

$14.34

$26,536.17

+$4,659.09

21.30%

-$289.76

American International Group Inc.

$40.17

$22,208.05

+$476.08

2.19%

-$135.25

AOL Inc.

$28.52

$16,581.12

-$5,151.12

-23.7%

-$53.34

ATC Technology Corp.

$18.21

$21,742.74

+$0.00

0.00%

+$0.00

Bank of America Corp.

$18.67

$17,220.53

-$4,547.06

-20.89%

-$139.91

Burger King Holdings, Inc.

$21.83

$21,871.48

+$0.00

0.00%

+$0.00

Citigroup Inc.

$4.62

$23,101.55

+$1,364.45

6.28%

+$0.00

Ciena Corp.

$18.07

$32,781.75

+$11,043.54

50.80%

-$1,058.64

Ford Motor Co.

$12.80

$27,353.90

+$5,606.70

25.78%

+$16.99

GameStop Corp. Cl A

$23.67

$18,396.72

-$3,332.34

-15.34%

+$156.06

Goodyear Tire & Rubber Co.

$13.96

$22,419.62

+$669.94

3.08%

+$311.60

Juniper Networks Inc.

$31.26

$30,851.05

+$9,125.35

42.00%

+$535.15

Kimco Realty Corp.

$16.49

$24,735.92

+$2,549.13

11.49%

-$228.79

KRISPY KREME DOUGHNUT

$4.88

$31,489.78

+$9,754.26

44.88%

-$222.70

Eli Lilly & Co.

$36.88

$21,122.15

-$1,474.66

-6.53%

-$55.15

Microsoft Corp.

$30.39

$19,558.79

-$2,488.12

-11.29%

-$79.80

NUTRI/SYSTEM

$19.03

$23,112.13

+$977.06

4.41%

-$93.05

News Corp. Cl A

$15.47

$24,173.50

+$2,317.04

10.60%

+$268.44

Pfizer Inc.

$17.20

$24,874.06

+$2,417.44

10.76%

+$0.00

BANCO SANTANDER SA ADR

$14.51

$18,668.71

-$3,901.63

-17.29%

+$326.70

Textron Inc.

$22.55

$26,696.21

+$4,892.53

22.44%

+$212.72

USG Corp.

$18.87

$21,024.00

-$714.24

-3.29%

-$1,324.80

Zions Bancorp

$24.58

$21,766.40

+$17.70

0.08%

-$97.33






Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

You may also like...

3 Responses

  1. I'm with you my friend:

    "Without changing these portfolios, the loser stocks will pull far ahead of the aggregate returns of these super mutual funds. Time is the enemy of the fees they will generate internally. And fees are forever."

    Kinda like the absolute worst quality diamond eh? "Fees are forever"? 🙂

    Thanks for the update Andrew!

  2. @My Own Advisor

    Thanks for encouraging me to keep this "contest" going Mark! It's thanks to you that I posted it.

  3. Robber Baron says:

    Hi Andrew,

    What's the Update on the "Losers vs. Actively Managed" project? How about a new post?

Leave a Reply