Fees · Investing

Return Chasing

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It was Thanksgiving 2017 and I was having an investing conversation. During the conversation, I tried to explain the dangers of “return chasing”, picking investments solely based on past performance and projecting past performance into the future. Picking a fund that has had a good run is not an effective investment strategy. Instead of return chasing, I encouraged purchasing a low-cost, total market index fund, such as Vanguard’s Total Stock Market Index fund (VTSAX).

I wasn’t successful in getting my point across.

The conversation included a list of thirteen different mutual funds, mostly provided by Fidelity. I jotted these down, and now that it’s been just over two years since that conversation, I decided to check on how they’ve fared so far.

Into the Time Machine

For this post, I’m only going to focus on the following large-cap funds: PARWX, FCTNX, FOCPX, and FEQIX.

Ticker Name Exp. Ratio Category
VTSAX Vanguard Total Stock Mkt Idx Adm .04% US Large-Cap Blend
PARWX Parnassus Endeavor Investor .95% US Large-Cap Blend
FCNTX Fidelity Contrafund .85% US Large-Cap Growth
FOCPX Fidelity OTC .89% US Large-Cap Growth
FEQIX Fidelity Equity-Income .61% US Large-Cap Value

At the point of the conversation, here’s how $10k would have fared if invested 10-years earlier. I’m using the “adjusted closing price[1]” because that takes in account dividends and splits for a complete performance picture. Blue are blended funds, yellow are growth funds, and red is a value fund:

Wow! The PARWX’s manager must be pretty sharp. If only we’d placed all of our money into his hands. Our hypothetical $10k would have outpaced all of the others by a good margin, returning 1.5 times the total return of VTSAX, over $12.5k. Jerome[2] really earned that .95% expense ratio, nearly 24 times the expense ratio of VTSAX.

FOCPX came in second place to PARWX, earning us an additional $8k over VTSAX’s return.

Meanwhile, it’s a good thing our hypothetical money didn’t go into FEQIX, or we would have lagged even VTSAX by $5,764.

Ticker Category 10-Year Growth of $10k Annual Average Return
PARWX US Large-Cap Blend $35,599 13.5%
FOCPX US Large-Cap Growth $31,412 12.1%
FCNTX US Large-Cap Growth $23,582 9.0%
VTSAX US Large-Cap Blend $23,066 8.7%
FEQIX US Large-Cap Value $17,302 5.6%

Back to the Future

But alas, the last 10 years was only hypothetical. Now we’ve got real money to invest. Where do we put it? Surely PARWX would be a good bet? Even if the next ten years isn’t stellar as the previous ten, it surely will beat VTSAX, right?

Now granted, 2 ½ isn’t a 100% comparison to a 10-year period, but it is still illustrative. I didn’t want to wait another 7 ½ years to check. Look for another post in December 2027 🙂

Here’s the chart as of April, 2020:

What happened!?! Our darling, PARWX, went from being the top dog to the under dog, even worse than FEQIX!

Ticker Category 2 ½-Year Growth of $10k Annual Average Return
FOCPX US Large-Cap Growth $11,182 5.7%
FCNTX US Large-Cap Growth $11,113 5.4%
VTSAX US Large-Cap Blend $9,356 -3.3%
FEQIX US Large-Cap Value $9,190 -4.1%
PARWX US Large-Cap Blend $8,333 -8.7%

What’s the Point?

There’s a risk that a return chaser will scoff at my analysis. “It wasn’t long enough” or “your index fund still lost to other funds”, or other such complaints.

That’s not the point. The point is that PARWX’s previous history did not predict future success. It went from being the absolutely best to being the worst.

Could PARWX catch back up over the long haul? Maybe, but it does so at a significant disadvantage.

The truth is that given a longer period, managed funds like PARWX, on average don’t beat the market. A 2016 study pointed out that over a fifteen year period, 92.15% of large-cap managed funds underperformed their index benchmark[3]. That same study also pointed out that value funds (like our “dog” FEQIX) actually fared better than growth funds (like our “darlings” FOCPX and FCNTX).

Do you really think that you, an everyday investor pouring over Morningstar ratings, can pick a mutual fund manager who can beat the index benchmark for the next fifteen years?

What About Fees?

One reason that managed funds have it so bad is their fees. The following chart is comparing VTSAX against itself if it was saddled with the same .95% fee that PARWX was saddled with:

Over the ten years, the difference is over $2k, a significant headwind to be sailing into. To make things worse, fees remain the same even in down markets. And the effect of fees compound over time.

Final Thoughts

Over time, there are still some managed funds that will beat index funds over the long haul. But I don’t think I can pick them, nor do I think you can. The best bet is to focus on widely diversified, low-fee, index funds and ignore all the financial chaff that just distracts. Follow Warren Buffett’s advice from 2016: “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.[4]

Hasta luego!

Footnotes

  1. From Yahoo! Finance
  2. https://www.morningstar.com/funds/xnas/parwx/people
  3. https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf
  4. From the “The Little Book Of Common Sense Investing” by John C. Bogle (affiliate link)

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