Morningstar Advisor - April/May 2009 - (Page 21) Active Managers ‘Bearly’ Beat Index Funds Fund analyst Dan Culloton recently looked at how actively managed funds have fared versus similarly styled benchmarks thus far in this market. He found that while the typical active manager has beaten certain benchmarks from when the major market averages peaked on Oct. 9, 2007, through the end of January 2009, the victory hasn’t been clear-cut. Also, the typical stock-picker’s inability to beat the Standard & Poor’s style benchmarks in most categories undercuts the argument that active managers would hold up better in a severe downturn by favoring so-called higher-quality stocks. Overall, active managers don’t have a lot to crow about. Their margins of victory over the Russell and Morningstar Indexes were meager. (The largest gap was nearly 270 basis points, or hundredths of a percent, out of roughly 4,000 basis points in the mid-cap value category.) As Morningstar vice president of research John Rekenthaler noted after eyeballing the returns, that’s not much of a differentiation. Furthermore, on average, most active managers couldn’t beat most of the S&P indexes that impose a rudimentary profitability screen on their constituents to weed out lower-quality stocks. The typical active manager lagged his or her corresponding S&P style index, which each requires candidate companies to have four consecutive quarters of profitability before they are included, in seven of nine categories. Checking Up on Gold-Bug Funds Gold-focused mutual funds and ETFs have done well, but what about more-diversified funds with substantial gold holdings? Fund analyst David Kathman looked at diversified domesticstock funds with the largest percentage of their portfolio in gold and silver stocks. The top two funds are Nuveen Tradewinds Value Opportunities NVOAX and ING Value Choice PAVAX. They’re essentially clones of each other, both run by David Iben of Tradewinds Global Investors, and the top four holdings of both funds are gold-mining stocks: Lihir Gold Limited LIHR, Newmont Mining NEM, Barrick Gold ABX, and Kinross Gold KGC. Those holdings have helped both funds rank near the top of their categories for the year through Feb. 26, losing “only” about 6%. The funds also look good over the past year, when they’ve beaten about 90% of their peers, and even better over the trailing three months, when their 10% gains have topped 99% of their category peers. The other funds have also done pretty well, with seven of the remaining eight ranking in or near their categories’ top quartiles through Feb. 26. (The one exception is Ralph Parks Cyclical Equity RPCEX, whose gold holdings have been no match for a portfolio heavy in financial and industrial stocks.) Royce Low Priced Stock RYLPX, Royce Value RYVFX, Wells Fargo Advantage Small/Mid Cap Value SMMVX, and Wells Fargo Advantage Small Cap Value SSMVX have held up well over the past couple of months, but all have posted mediocre returns at best over the past year, with Wells Fargo Advantage Small/Mid Cap Value ranking in the bottom of the small-blend category. Why? There’s no single reason, but many of the same gold stocks that have helped these funds in recent months have lost ground over the past year. For example, Randgold Resources GOLD, the top holding of Wells Fargo Advantage Small/Mid Cap Value, has gained 30% over the past three months—but has lost 9% over the past 12 months. ‘Bearly’ Winning Average Active Fund by Category Average Return Anzd Russell Indexes Index Return Anzd Morningstar Indexes Index Return Anzd US OE Large Blend US OE Large Growth US OE Large Value US OE Mid-Cap Blend US OE Mid-Cap Growth US OE Mid-Cap Value US OE Small Blend US OE Small Growth US OE Small Value –37.21 –36.99 –38.16 –38.22 –40.20 –37.93 –39.11 –40.96 –37.31 Russell 1000 Russell 1000 Growth Russell 1000 Value Russell Mid Cap Russell Mid Cap Growth Russell Mid Cap Value Russell 2000 Russell 2000 Growth Russell 2000 Value –37.41 –35.12 –39.83 –40.36 –40.43 –40.62 –37.90 –38.59 –37.37 Morningstar Large Core Morningstar Large Growth Morningstar Large Value Morningstar Mid Core Morningstar Mid Growth Morningstar Mid Value Morningstar Small Core Morningstar Small Growth Morningstar Small Value –32.37 –37.09 –39.48 –39.19 –41.27 –40.17 –39.69 –39.60 –37.81 Average Active Fund Category Average Return Anzd Standard & Poor’s Index Return Anzd US OE Large Blend US OE Large Growth US OE Large Value US OE Mid-Cap Blend US OE Mid-Cap Growth US OE Mid-Cap Value US OE Small Blend US OE Small Growth US OE Small Value –37.21 –36.99 –38.16 –38.22 –40.20 –37.93 –39.11 –40.96 –37.31 S&P 500 S&P 500/Citi Growth S&P 500/Citi Value S&P MidCap 400 S&P MidCap 400/Citi Growth S&P MidCap 400/Citi Value S&P SmallCap 600 S&P SmallCap 600/Citi Growth S&P SmallCap 600/Citi Value –37.10 –32.43 –41.78 –36.11 –35.62 –36.61 –37.49 –37.74 –37.46 Returns are from Oct. 9, 2007, through Jan. 31, 2009. MorningstarAdvisor.com 21 http://www.MorningstarAdvisor.com
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