During the Los Angeles Olympic games of 1984 an American magazine carried a cover headline 'Exclusive! Absolutely Nothing About The Olympics'. The idea was, of course, that people must be sick of reading about the games so here was a publication that was offering some respite from the monotony. Readers must be feeling the same way about the New Year. Newspapers, magazines and television channels are full of reviews of what happened in 2006 and what is going to happen in 2007. So here's my contribution to the monotony --- an article based on how funds performed during the year past.
Except that I'm not going to talk about who did well and who did badly during the year. At Value Research, we've always believed that evaluating equity mutual funds' performance while the stock market are moving in just one direction gives a very shallow idea of how good a fund manager is. When the markets are zooming up, everyone looks good. Some funds don't do as well as others but because investors make money anyway, they aren't really too worried about making less money than other funds are making.
I believe that the real measure of a fund managers' mettle is how he or she does across a market cycle, that is, a period when markets rise, then fall and then rise again (or the other way around). How a fund manager handles the fall and how the fall affects his psychology and his confidence when they rise again is what separates the tyros from the seasoned experts. As it happens, a review of the year 2006 offers just such a market cycle. When the year began, the markets were rising fast and continued to do so till May 11, when they went into a 5-week slump. Around mid-June, they started rising again and continued to do so till the end of the year. Right at the end of the year, there have been some sputters but so far, this is a pause and not a crash. When we analyse and compared funds' performance data of these three periods instead of the standard calendar-based periods like months or quarters, we see some fascinating patterns.
Firstly, there were no funds that were in the top 20 per cent in all three periods. But that's OK - if you are trying to do well when the markets are rising you are unlikely to fall less when they crash. The really interesting fact is that a good number of funds managed to do well both before and after the mid-year crash. Of the 30 funds that were in the top 20 per cent in the first period when the stocks were rising, 14 managed to stay there when the markets were rising again at the end of the year. There was a remarkably similar consistency at the other end of the scale as well. Of the 30 funds that were in the worst 20 per cent, 14 stayed there both before and after the crash.
But the really interesting examples were those that managed to go from one extreme to the other. The fund that was at the top of the heap before the crash was in the worst 20 per cent in the post-crash period. But there were also those that moved in the other direction. There were five funds that moved from the bottom 20 per cent before the crash to the top 20 per cent later.
Clearly, the moral of the story is that this is far from being a time when one can invest indiscriminately in whatever investment comes along. There are funds which have things figured out and there are those who haven't and you owe it your money to find out who is who.
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