As I was scanning the mutual fund tables over the New Year's weekend (a pastime suited mainly for finance geeks and investing editors), what struck me most was, first, how few U.S. stock funds beat Standard & Poor's 500-stock index and, second, by how little most funds seemed to trail the index.
So rather than wait for Morningstar and other arbiters of the official results to publish their year-end numbers, I decided to look specifically at the performance of the Kiplinger 25 funds. As most of you know, that is the list of our favorite no-load, actively managed mutual funds.
What I saw startled me. The range of results of the 13 U.S.-oriented stock funds on the Kip 25 was remarkably narrow: Eight of the funds returned between -2.2% and 1.1%. It mattered not whether they focused on small-company stocks or blue chips, bargain-priced value stocks or fast growers. The S&P 500, which is oriented toward large companies, returned 2.1% (ignore all those reports about the S&P breaking even for the year; the 2.1% figure, which includes dividends, is the true measure of the market's performance).
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The Kip 25's five outliers barely lived up to the term. The worst performer among our domestic stock fund picks was Dodge & Cox Stock (symbol DODGX (opens in new tab)); it lost 4.1%. The best, in ascending order, were: FPA Crescent (FPACX (opens in new tab)), up 3.0%; BBH Core Select (BBTEX (opens in new tab)), up 5.7%; Vanguard Dividend Growth (VDIGX (opens in new tab)), up 9.4%; and Akre Focus (AKREX (opens in new tab)), which gained 11.1%.
Thankfully, we had no flat-out disasters. Perhaps our best call of the year was to dump Fairholme Fund (FAIRX (opens in new tab)) from the Kip 25 in the May issue of Kiplinger's Personal Finance magazine, which began arriving in subscribers' mailboxes in late March. Fairholme lost a stunning 32.4% in 2011 as manager Bruce Berkowitz's huge bet on financial stocks came back to bite him and his fund's shareholders.
Getting back to the narrow band of returns for our domestic stock fund picks, I think the explanation lies in what Kiplinger's columnist Jeremy Siegel calls the "nowhere to run" market. As Siegel writes in the magazine's February issue, the big story of 2011, other than the market's fearsome volatility, was the incredibly high degree of correlation among stocks and, for that matter, among most asset classes. On days when the U.S. stock market, for instance, made a huge move (The New York Times (opens in new tab) reports that the market went up or down at least 2% on 35 occasions in 2011), just about all stocks went up or just about all went down. Sure, you could have made more by focusing on defensive, dividend-paying stocks such as utilities and makers of consumer staples. Or you could have lost more by betting big on banks or on microcaps (stocks of tiny companies). But it appears that most of our Kiplinger 25 favorites stayed pretty much in the mainstream with their stock picks.
The results were less felicitous for the international and global stock funds in the Kip 25. Reflecting the euro zone crisis and Japan's longstanding woes, which were exacerbated by the tsunami and the nuclear-reactor disaster, the MSCI EAFE index, the most widely followed measure of performance in developed markets, lost 11.7% last year. Our two diversified foreign funds, Dodge & Cox International Stock (DODFX (opens in new tab)) and Harbor International (HIINX (opens in new tab)), lost 16.0% and 11.4%, respectively. T. Rowe Price Emerging Markets Stock (PRMSX (opens in new tab)) sank 18.8%, roughly matching emerging-markets indexes. And Oakmark Global (OAKGX (opens in new tab)), which invests in both U.S. and foreign stocks, surrendered 11.7%.
The bond funds in the Kip 25 did OK. Each made money, ranging from 1.9% for the very conservative Vanguard Short-Term Investment Grade Bond Fund (VFSTX (opens in new tab)) to 9.2% for DoubleLine Total Return (DLTNX (opens in new tab)), which was added to the Kiplinger 25 in last May's issue. Even the year's most disappointing bond fund, Harbor Bond (HABDX (opens in new tab)), run by Pimco's Bill Gross, the nation's most famous bond manager, managed a 3.5% gain. In a rocky year, that was nothing to sneeze at.
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