How do you define the best and worst funds from the past year? Many use the simple yardstick of which funds posted the best returns over the last 12 months. But we take a different approach: We define “best” as a composite of many things -- 50 performance attributes, to be precise -- covering risk, return and other metrics. These 50 attributes aren’t uniformly applied to all types of investors, either. Each attribute is weighted for the unique goals and risk attitudes of each investor. With this in mind, let’s take a look at this month’s fictitious investor.
Case Study: John and Tammy Robertson
John and Tammy are in their early 30s, they’re married and plan to start a family within the next couple of years. They both work at jobs they enjoy and earn a stable income. They have been building wealth through a well-allocated investment portfolio and want to ensure that it will grow to help them meet big expenses down the road, such as college educations for their children. At the same time, they’re mindful of not taking on unnecessary risks.
John and Tammy are not highly sophisticated investors, but they understand that a sizable equity component is appropriate for their stage in life. They want to find an equity fund from across all equity asset classes that will give them a good chance of portfolio growth.
They decide to look across a broad array of equities, including domestic large and small-cap funds, international funds, emerging markets, etc., and see which funds make a compelling case for performance. When they pick funds, they’ll consider the funds performance over multiple time periods, risk level, and fees.
Here are the three funds are the top choices for John and Tammy, according to our research:
John and Tammy Robertson’s Top Three Equity Funds
These are from a pool of 5188 funds with a track record of at least 10 years.
The top three tell an interesting story: they are all domestic U.S. funds. Two are small cap and one is large cap. U.S. equities have been stronger performers than non-U.S. equities for several years. The financial crisis in Europe, chronic economic stagnation in Japan and volatile conditions in emerging markets have hit the international sector hard, while U.S. equities have been seen as generally higher quality. Of course, these conditions may change with the global economic cycle, but in 2012 a decent allocation weight to U.S. equities appears to be a prudent course of action.
The Yacktman fund stands out as one that delivers strong returns over multiple time periods with considerably less risk. Notice its lower standard deviation, which is a common measure of investment risk. For an actively-managed fund, its expense ratio of 0.8% is comparatively attractive. This fund seems like it would be a natural for the investment goals of a couple like John and Tammy, but they may also consider adding one of the small cap funds for portfolio diversification.
What about poor performers? Here are the laggards, based on poor total return performance along with slightly higher risk metrics and unnecessarily higher expenses. (Interestingly, they are all international equities.)
Three Worst Equity Funds for John and Tammy Robertson
Whether you’re choosing funds for long-term investment goals or allocating a small percentage of your portfolio for intermediate tactical plays, it’s always a good idea to pay attention to performance in the areas that matter most to you—whether that’s long- or short-term returns, risk, management team tenure or fees.
Keep in mind that generic rankings are not going to give you insights into how fund performance relates to your own unique investment needs. And watch out for brokers trying to sell you whatever funds their firm happens to be pushing that week. These may include those funds at the bottom of the pile that you want to stay away from.
Jemstep Inc. is a free online investment advisor that helps individual investors make better investment decisions and achieve their financial goals faster. Jemstep’s investment evaluations, based on patented technology and objective market data, are unbiased and transparent. Jemstep does not accept paid listings or sponsorships that influence its fund rankings in any way, nor does it factor subjective user reviews into the guidance it provides. A privately owned company with headquarters in the heart of Silicon Valley, Jemstep is a registered investment advisor under the rules and regulations of the U.S. Securities and Exchange Commission. For a free, easy way and objective way to find the best investments for you, visit Jemstep.com.