The next two years are going to be wonderful for a stock fund's 10-year record.
The worst bear market since the Great Depression started ten years ago, on Oct. 9, 2007, with the Standard & Poor's 500 stock index at 1,565.15. When it ended, on March 9, 2009, the blue-chip index sat at 676.53 – a 56.8% loss.
Starting today, the devastating effects of the
bear market will roll off a fund's 10-year record, meaning that even if the stock market goes nowhere the next 18 months, a fund's 10-year return will improve dramatically.
Consider PRIMECAP Odyssey Aggressive Growth (POAGX), the top-performing diversified U.S. stock mutual fund since Oct. 1, 2007. It's up 235% through Oct. 1 this year, according to Morningstar. If management were to park the fund's assets in safety deposit vault for the next 18 months, the fund would have produced a 545% 10-year gain, assuming one ignored inflation and had a safety deposit box large enough to hold $8.8 billion – the fund's current assets.
Similarly, the Guggenheim S&P 500 Pure Value ETF (RPV), has gained 121.3% the past decade. But the fund is the top-performing U.S. diversified fund or ETF since March 1, 2009, soaring 594%.
One of the biggest beneficiaries of the next two years – barring a similar meltdown – is
Miller Opportunity C, which swooned a mind-melting 76.85% from October 1, 2007 to March 1, 2009. Its total return for the past decade: 27%. Drop off the bear market, however, and the fund is up 452%. "If only we could do that with actual portfolios," said
Russel Kinnel, director of mutual fund research at Morningstar.
What can advisers learn about this?
• A full market cycle record – bear to bull – might tell more about a fund's characteristics than the funds' record for the number of times the Earth has rotated around the sun. Probably the biggest props for the cycle has to go to Reynolds Blue Chip growth (RBCGX), which ranks 14th among all diversified U.S. stock funds the past decade. It's up 192%. But the fund lost just 3% during the bear market. Its record won't improve much as the bear market recedes into history, although it should still win the gratitude of its investors.
• A long bull market can do a lot for a growth fund's record. PowerShares QQQ ETF – Qubes, to its fans – tracks the tech-heavy Nasdaq 100 stock index. The ETF has 58% of its assets in technology, and Apple accounts for 11.6% of its holdings. Despite its 46.2% plunge in the bear market, the fund's 478% gain has given it a 211% gain for the past 10 years, putting it in sixth place for the cycle. "We are in a FAANGS era," said Mr. Kinnel. (FAANG stocks are Facebook, Apple, Amazon, Netflix and Google, which have led the market in the recovery.)
• Just as all unhappy families are different, all bear markets are different, too. "You can read way too much into previous bear markets," said Mr. Kinnel. For example, investors jumped into the American funds after the 2000-2002 bear market because they had held up well. They are value-oriented, low-turnover funds. But value stocks got hit hard in the 2007-2009 bear market, which ripped ferociously into banks and industrials, two staples of the value universe.
Don't let the long bull market blind you. "The best way to invest is by recognizing that some funds and ETFs are better for bear markets and some are best for bull markets," Mr. Kinnel said. "Don't read too much into the last two or three years."
PRIMECAP Odyssey Aggressive Growth | POAGX | Mid-Cap Growth | 235% | -48% | 545% |
Brown Capital Mgmt Small Co Inv | BCSIX | Small Growth | 228% | -37% | 423% |
Parnassus Endeavor Investor | PARWX | Large Growth | 227% | -42% | 462% |
PIMCO StocksPLUS® Small Institutional | PSCSX | Small Blend | 221% | -50% | 538% |
T. Rowe Price New Horizons | PRNHX | Small Growth | 213% | -49% | 517% |
PowerShares QQQ ETF | QQQ | Large Growth | 211% | -46% | 478% |
Shelton Nasdaq-100 Index Direct | NASDX | Large Growth | 209% | -46% | 473% |
Eaton Vance Atlanta Capital SMID-Cap I | EISMX | Mid-Cap Growth | 208% | -36% | 381% |
Jackson Square SMID-Cap Growth IS | DCGTX | Mid-Cap Growth | 204% | -50% | 504% |
Fidelity® OTC | FOCPX | Large Growth | 204% | -49% | 496% |
VALIC Company I NASDAQ-100 Index | VCNIX | Large Growth | 202% | -47% | 466% |
Fidelity® Small Cap Discovery | FSCRX | Small Blend | 199% | -44% | 431% |
Virtus KAR Small-Cap Growth I | PXSGX | Small Growth | 197% | -48% | 468% |
USAA NASDAQ-100 Index | USNQX | Large Growth | 197% | -47% | 456% |
Reynolds Blue Chip Growth | RBCGX | Large Growth | 192% | -3% | 201% |
First Trust US Equity Opportunities ETF | FPX | Large Growth | 186% | -49% | 461% |
Dreyfus Opportunistic Small Cap Inv | DSCVX | Small Growth | 186% | -42% | 397% |
Monetta Young Investor | MYIFX | Large Growth | 186% | -39% | 370% |
PIMCO RAE Fundamental PLUS Inst | PXTIX | Large Value | 186% | -58% | 577% |
Janus Henderson Triton D | JANIX | Small Growth | 182% | -47% | 430% |
Rydex NASDAQ-100® Inv | RYOCX | Large Growth | 180% | -47% | 429% |
AMG Managers Cadence Emerging Cos I | MECIX | Small Growth | 180% | -54% | 505% |
Fidelity® Growth Company | FDGRX | Large Growth | 179% | -47% | 424% |
Hotchkis & Wiley Value Opps Instl | HWAIX | Large Value | 178% | -57% | 548% |
Nationwide Ziegler NYSEArcaTech100 A | NWJCX | Large Growth | 176% | -43% | 385% |
S&P 500 total return | | | 105% | -50% | 311% |
Source: Morningstar