Momentum Newsletters on Top
A fund's strategy? Unimportant. The experience level of its manager? Not meaningful. Expenses? So what. That pretty much describes the attitudes of the folks who publish some of the best-performing mutual fund newsletters. Instead of focusing on what passes for fundamental analysis in determining what funds to recommend, these letter writers base their picks entirely on what's hot now.
The three best-performing fund newsletters over the past ten years through June 30 primarily use momentum strategies when they choose funds, according to the Hulbert Financial Digest, which tracks investment letters. Over that period, the average portfolios of all three beat Standard Poor's 500-stock index by at least four percentage points per year.
Momentum investing works well when the market is moving strongly in one way or another for long periods. It tends to not work so well in a directionless market. Momentum strategies also tend to produce above-average volatility. Moreover, the approach tends to lead to high turnover, which can result in unpleasant tax consequences. On the other hand, the three letters described below performed admirably during the 2000-02 bear market, saving their subscribers from a lot of anguish. So if you're a thrill-seeking investor, it wouldn't hurt to use these newsletters to pick some of your funds.
We list the top three fund letters in order based on their ten-year results. The returns from Hulbert are averages for all portfolios recommended by each letter. Request a free sample copy before subscribing to any investing newsletter.
No Load Fund*X
No Load Fund*X is recommending international funds and funds that buy undervalued stocks. Lately, it has been moving away from small-company funds, which have outpaced funds that invest in large companies for most of the past six and a half years. Editor Janet Brown doesn't know whether the shift is permanent. She tells readers in the August issue that "it's far safer to invest based on what is happening rather than what we think might happen."
Brown and her staff rank fund results over the previous one, three, six and 12 months. They give preference to funds that are in the top 15 for each period. Then they highlight the category winners. The letter advises readers to hold a fund until it falls out of the top five in four classes based on risk tolerance. The letter's recommendations returned an annualized 17% over the past ten years. By contrast, the SP 500 gained an annualized 8%. The volatility of its portfolios is average, according to Hulbert's ratings. Dodge Cox International Stock (symbol DODFX), Fidelity Utilities (FIUIX) and iShares SP Euro 350 (IEV) are among the letter's top picks.
Cost: $179 per year; $149 for online access only. 800-763-8639; www.fundx.com
Equity Fund Outlook
Equity Fund Outlook grades funds on how well they have performed over the past three years. Editor Thurman Smith usually flunks any fund that scores less than 90 on his 100-point risk-reward scale. He doesn't focus solely on momentum. His grades also evaluate how funds perform during market declines.
Originally a computer programmer for Loomis Sales and Fidelity Investments, Smith started his newsletter in 1988. He gives one set of recommendations for taxable accounts. These picks are designed to produce less turnover than his choices for tax-deferred accounts. His recent picks include ABN AMRO/River Road Small Cap Value (ARSVX), FBR Pegasus (FBRPX) and Kinetics Paradigm (WWNPX). Over the past ten years, Smith's portfolios returned an annualized 15%. Hulbert rates the volatility of the portfolios as high.
Cost: $159 per year; $105 online. 800-982-0055; www.equityfundoutlook.com
All Star Fund Trader
All Star Fund Trader prefers exchanged-traded funds for most of its picks. Editor Ron Rowland, a former IBM engineer, buys funds that are on the top of the heap for the most recent two or three months and holds on to them until they are no longer king of the hill. Rowland adjusts picks based on risk and will recommend holding cash in long market downturns. Over the past ten years, the letter's portfolios returned 13% annualized, on average, with high volatility, according to Hulbert. Rowland currently favors PowerShares Dynamic Energy Exploration (PXE), iShares Morningstar Large Value (JKF) and iShares MSCI Mexico (EWW).
Cost: $249 per year; $199 online. 800-299-4223; www.allstarinvestor.com