https://www.google.com/amp/s/www.marketwatch.com/amp/story/this-warning-label-gives-you-a-dose-of-reality-about-mutual-funds-on-a-hot-streak-11617052090https://ottotrading.live/opinion-this-warning-label-gives-you-a-dose-of-reality-about-mutual-funds-on-a-roll/This warning label gives you a dose of reality about mutual funds on a hot streak
Published: March 29, 2021 at 5:08 p.m. ET
By Mark Hulbert
‘Past performance does not guarantee future results’ is a poor disclaimer
Which of the following two caveats would do the best job of preventing investors from paying too much attention to an investment’s recent performance? The first caveat is what is currently required in all investment advertising. The second is a proposal that the Securities and Exchange Commission is considering adding to the first.
In fact, both warning labels malfunction. According to a recently published study, neither of them effectively deters investors from believing that an investment adviser on a hot streak will be able to continue to do so. This widely held belief is known as the hot hand bias or the hot hand fallacy. The culprits believe that, among two funds with the same long-term performance, the one whose most recent performance is superior is the best bet for future performance. This new study appeared in the Journal of Public Policy & Marketing.
Maybe better to have a diversified plans and may need hold several assets in a basket to reap investment returns
Comments
Exhibit B.....Vanguard’s Wellington funds
Exhibit C....(many) PIMCO funds
Exhibit D....FLPSX
(etc.)
Yes yes, we all know index funds are the only thing to invest in. But there ARE a smattering of good managers that, while they might not ALWAYS beat their benchmark (as in each calendar year, e.g.), come close, and can even outperform over time.
A more convincing argument could be made if one looked at the worst performing funds. Because, unlike good funds, poor funds have a greater tendency to continue performing as they have in the past. See Carhart's landmark paper.
VWELX hasn't been outperforming its benchmark over time: not over 1 year (16.79% vs. 20.70% for its benchmark), not over 3 years (9.80% vs. 11.67%), not over 5 years (11.51% vs. 12.66%) and not over 10 years (9.44% vs. 10.46%). These numbers are as of Feb 28,2021 and come straight from Vanguard using Vanguard's chosen blended benchmark.
https://investor.vanguard.com/mutual-funds/profile/performance/vwelx
Let's assume that you're right, that over its lifetime (since July 1, 1929) Wellington did outperform. That would mean that after outperforming for its first 82 years, through Feb 28, 2011, it underperformed its benchmark overall for the next ten years.
Its four score and two year long outperformance didn't serve as a guarantee of future outperformance over time - over the subsequent decade.
FLPSX shows similar underperformance in the past decade, though Fidelity never explicitly names the R2K as its benchmark. Fidelity just displays FLPSX's performance relative to the R2K and bases part of the manager's bonus on how well it does relative to the R2K (see SAI). (Here's a chart showing FLPSX vs. the R2K and the S&P 400; it underperformed both over the past decade through March 30, 2021.)
1 year (33.38% vs 51.00% for R2K), 3 years (9.26% vs. 14.87%), 5 years (12.37% vs. 17.92%), 10 years (10.73% vs 11.86%). These figures through Feb 28, 2021.
https://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316345305?type=o-NavBar
Unlike Vanguard, Fidelity does compare the fund's lifetime performance with that of its benchmark, so we don't have to make any assumptions. Since its inception on Dec. 27, 1989 through Feb 28, 2021, FLPSX outperformed its benchmark, 13.35% to 10.19%.
Which means that a couple of decades (21 years) of outperformance did not guarantee a future of outperformance over the next decade.
The post I was responding to used the term "benchmark". While you and I might disagree with the views that M*, Lipper, and Fidelity have of the fund, the fact is remains that the R2K is the fund's designated benchmark. And the fund has no requirement that it invest in foreign securities (unlike typical global funds). That's what the manager chooses to do in an attempt to outperform.
Personally I think of it as a global fund. I agree with your sentiment and would not be comparing it with its benchmark. I also would not be comparing it with its M* or Lipper "peers". But FLPSX was presented as Exhibit D, a fund that can outperform its benchmark over time. In short, it's a lousy exhibit because it has a poorly matched benchmark.
I used it awhile back but the rapid growth slowed its performance.