So, the summer ends, and we enter what has historically been a very interesting part of the calendar year for investors. The last 12 months have been a challenge for investors of all varieties. We have seen articles on the performance of some of the most accomplished investors in the world for 2008 and the past 12 months IT ain't pretty. And, while we don't focus too much energy on the short-term, in times of declining asset values, we feel it is our duty to provide some insight from viewing what has occurred across various market segments. There is a lot to learn from bear markets like this one, and not learning the lessons can be very expensive.
We analyzed market performance for the 12 months through Thursday, August 28 for the 69 mutual funds categories tracked by Morningstar. We find this universe of indexes to be very helpful, as it covers both traditional and some non-traditional fund types.
THE FACTS
So, what did we find, and just as importantly, what's the explanation for the title of this week's GreenThought$? While my 12-year old daughter introduced me to the term "OMG" a while back, it turns out that OMG pretty well summarizes the main investment areas that have worked over the past 12 months: Oil, Materials and Gold. Two "Specialty" fund categories - Natural Resources and Precious Metals - returned 19.5% and 11.8% respectively.
Latin American stocks, Long-Government Bonds and Inflation-Protected Bonds were the only other categories that returned over 10%. In fact, no other category made more than 6.2%, a return which, over a long period of time, would be considered mediocre by growth investors.
Bond funds were a place to hide (at least for this period of time), with most high-quality bond categories gaining in the low single-digits. Utility stocks gained 0.3%, Long-Short and Bear-Funds (those that primarily short the stock market), and Convertibles funds held their ground, with losses of 1.4%, 1.0% and 2.9% respectively.
As the New York sportscasting icon Warner Wolf would say, "you could have turned your TV sets off right there!" Broad-based equity funds lost between 4% and 16%.
Asset allocation fund categories showed how difficult it has been to turn a profit over the past 12 months. None of them did. Even the so-called "Conservative Allocation Funds" lost 1.5%, despite the fact that funds in this category typically have only around 20-40% of their assets in stocks. Let's face it, stocks were toxic to your asset allocation, unless you had some OMG.
Finally, thanks to Rodney Madden and Matthew Bell, two advisors at different firms in Dallas and San Antonio, for the following info:
"Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have positive returns for both the past 12 months and year-to-date, according to investment researcher Morningstar Inc."
THE INSIGHT
Of course, the periods we just described are a very small fraction of your investment lifetime, so perspective is necessary. Rather than overreact to anything that's happened in the recent past, here are some questions and one-word answers (the latter being a rarity for this writer):
1a. Should you pile into Long-Term Government bonds following the "flight to safety" effect that drove their recent positive returns? NO!
1b. Should you try to extrapolate any of this short-term performance and assume that these returns will continue in the same pattern? NO!*
1c. Should you think about how to adapt to the tough secular environment we are in? YES!
2a. Should you allocate entirely to bear funds, given all the problems in the markets? NO!
(hindsight is a beautiful thing, but it is not reality)
2b. Should you include shorting capabilities in your portfolio construction? YES!
3a. Should you assume that there will be a broad sector of the stock market that breaks ranks with the others and delivers strong returns when the others don't? NO!
(We like to say that "stocks plus stocks equals stocks" - diversifying large cap with small cap, value with growth, or domestic with international will have a modest impact on the risk/reward balance of your portfolio, but it is not likely to have a dramatic impact much of the time. That's our opinion, and we are sticking to it.
3b. Should you be a flexible and more creative asset allocator in times like this? YES
We hope these guidelines help you think about what you really want out of your portfolio (and if you are an advisor, your clients' portfolios) during a time that is challenging for all yet exciting for those of us who seek bull markets wherever they exist. We suspect we will continue to find them in some non-traditional places.
If you want to see the site where we pulled the data for this article, Morningstar updates it every day on their website. Here's the link: http://news.morningstar.com/fundReturns/CategoryReturns.html?msection=FundCatReturns
However, since it updates each day, if you want to see the data through 8/28/08, email or call us and well forward it to you.
*Past performance is not necessarily an indication of future returns, after all!
The preceding article is not a complete analysis and should not be considered investment advice. Emerald Asset Advisors, LLC ("Emerald") is a SEC registered investment adviser. If you would like to receive more information about Emerald, please contact us for a free copy of our disclosure document, Form ADV Part 2 and Schedule F.
