FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
Meeting Mr. Mutual Fund
How the Foolish Four and Beating the S&P stack up

By Ethan Haskel (TMF Cormend)

BALTIMORE, MD (Oct. 13, 1999) -- This past weekend I had the pleasure of joining Tom Gardner and other Fools in an investing seminar in downtown Baltimore. I especially enjoyed hanging around the Fool booth, talking with Fools and Fools-to-be, and watching Tom get writer's cramp from signing all those books.

The highlights of the seminar were the keynote addresses by Tom and Don Phillips. For those not familiar with Don Phillips, he's President and CEO of Morningstar, Inc., the leading provider of data on mutual funds. SmartMoney magazine recently proclaimed him the sixth most influential person in the mutual fund industry. Mr. Phillips and Morningstar are synonymous with mutual fund information services.

Prior to his speech, I had the pleasure of chatting with Mr. Mutual Fund. I initially thought he'd be distrustful of Fools like me, since Foolish dogma generally proclaims that any fund without "index" in its title is immediately suspect.

Au contraire. Mr. Phillips -- Don (anyone who has the sense not to wear a tie for a keynote address wouldn't seem to mind being called by a first name) -- is a "huge fan" of The Motley Fool. He especially likes the way our forum has given individual investors the tools to make independent financial decisions. Foolish Four investors might also be glad to hear that the concept of Dow dividend investing earned the Phillips seal of approval.

I was most interested in asking Mr. Mutual Fund about the performance of funds over the long haul. As such, Don gave me a brief tour of his Morningstar site (on the largest, sharpest monitor I've ever seen, by the way).

Through his site, I was able to verify that the Vanguard 500 Index Fund, designed to mimic the returns of the S&P 500, outperformed 91% of all mutual funds over the past 10 years. I suspect this number actually understates the Vanguard fund performance, because it likely doesn't take into account the effect of survivor bias. Many mutual funds with lousy records are routinely rolled into other funds, or change names, forever masking dismal returns and increasing the overall average return for those that do survive.

Unfortunately, the Morningstar site only gives year-by-year fund performance back to 1992. Don did mention that there was software available (for a fee) that would supply longer-term results. The site also provides a screening tool (Fund Selector), which can be used to find the funds with the best 10-year performance.

I was also able to access Morningstar data to screen mutual funds through America Online's Fund Finder. The site, accessible to non-AOL members as well, allows investors to screen for funds based on certain desirable characteristics.

I kept my search simple. I was interested to see what mutual funds, of any type, had the best 10-year performance record. There were 7,866 funds available for screening, but only 1,500 could boast a decade life span. Of these 1,500 funds, the top nine performers were all narrow sector funds that pretty much invested exclusively in technology or communications companies.

The tenth stock on the list, the first that represented anything that could be considered close to a diversified fund, was the Janus Twenty Fund. This Janus fund, ranked in the top 99 percentile of all mutual funds, returned 23.3% annually for the last 10 years.

I thought this would be an appropriate time to compare the 10-year results of our Foolish Four (F4) and Beating the S&P (BSP) portfolios with the Janus Twenty Fund, the mutual fund king of the hill.

           Janus 20     FF        BSP**    S&P 500  
1989        23.9%      47.4%      34.1%      31.5%
1990         0.6      -17.6       -4.3       -3.2
1991        69.2       34.8       25.5       30.6
1992         2.0       29.9        3.9        7.7
1993         3.4       30.3       20.2       10.0
1994        -6.7        7.6        5.6        1.3
1995        36.2       47.1       48.0       37.4
1996        27.9       26.6       33.5       23.1
1997        29.7       19.5       47.1       33.4
1998        73.4       15.6       61.0       28.7

CAGR*       23.3%      22.6%      25.8%      19.2%
* Compound Annual Growth Rate (not the mean average)
**BSP strategy returns quoted here are the new returns that exclude split stocks as described in Split Decisions

For the past 10 years, both the Foolish Four and Beating the S&P portfolios have kept pace with, if not bested, the best-performing non-sector mutual fund in existence.

There are a few caveats about the comparisons in the chart above. The Janus fund is the only "real money" portfolio there. The returns for the others don't take into account trading costs and other real-life situations (e.g., bid/ask spreads). However, the Janus fund reinvests dividends quarterly while the others merely roll them over at the end of the year, giving an advantage to Janus which could be duplicated by Foolish Four or BSP investors. Also, it would be premature to make any definitive statements about comparative returns for the portfolios, since it's unlikely that any observed differences are statistically significant over this time period.

Despite these caveats, our Foolish Four and Beating the S&P returns have pretty much knocked the socks off any mutual fund that's been around since the fall of the Berlin Wall.

Let's doff our Foolish caps to the Janus Twenty Fund, which has racked up these excellent gains. To see what kind of stocks the Janus fund likes to buy, let's check out their top holdings as of the end of July: America Online (NYSE: AOL), American International Group (NYSE: AIG), Cisco Systems (Nasdaq: CSCO), Dell Computer (Nasdaq: DELL), and General Electric (NYSE: GE). Very Foolish, indeed! Of course, many of these companies are a heck of a lot more sexy (and volatile) than Caterpillar (NYSE: CAT) or Kimberly-Clark (NYSE: KMB), just two examples of the dishrags we like to wear around here.

Care to buy some shares of the Foolish Janus Twenty Fund? So sorry, that fund closed to new investors last April. And Tom Marsico, the previous fund manager who racked up most of these delicious gains, departed in 1997. (Scott Schoelzel, the new manager, has done quite well since then, but those past results aren't his.)

By sticking to the Foolish Four and the Beating the S&P stocks, you've created one heck of a good mutual fund for yourself. This is one fund that won't ever close. And the only way the fund manager will leave is if you fire yourself!

Beating the S&P year-to-date returns (as of 10-12-99):
Schlumberger (NYSE: SLB)      +22.1%
Kimberly-Clark (NYSE: KMB)     +1.8%
Campbell Soup (NYSE: CPB)     -23.3%
Ford Motor Co.  (NYSE: F)      -7.3%
Bank of America  (NYSE: BAC)   -8.7%
Beating the S&P                -3.1%
Standard & Poor's 500 Index    +6.8%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +24.4%
S&P 500                       +17.4%

$10,000 invested on 1-2-87 now equals: Beating the S&P $159,100 S&P 500 $76,000
(Yes, these returns now incorporate the new split data.)

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

10/13/99

1. Philip Morris
   (NYSE:MO)
2. * Sears
   (NYSE:S)
3. * General Motors
   (NYSE:GM)
4. * Goodyear Tire & Rubber
   (NYSE:GT)
5. * JP Morgan
   (NYSE:JPM)
6. Caterpillar
   (NYSE:CAT)
7. Chevron
   (NYSE:CHV)
8. Eastman Kodak
   (NYSE:EK)
9. DuPont
   (NYSE:DD)
10. International Paper
   (NYSE:IP)

NOTE: Today's Foolish Four stock selections are marked with an asterisk.

Foolish Four Portfolio

10/13/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC1/16$56.56
IPINTL PAPER11/16$49.38
JPMMORGAN (JP)-4 3/8$109.50
MMMMINNESOTA MIN'G/MFG-1 9/16$90.81

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four -.43% -2.08% -.94% 17.78% 19.53% 24.81%
S&P 500(DA) -2.09% -3.78% .22% 5.16% 5.22% 6.53%
NASDAQ -2.48% -2.96% 2.01% 27.75% 28.94% 37.13%
DJIA (DA) -1.77% -3.92% -1.01% 12.36% 12.53% 15.80%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9824CAT43.083$56.5631.29%
12/24/9814MMM73.571$90.8123.43%
12/24/9822IP43.551$49.3813.37%
12/24/989JPM105.514$109.503.78%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9824CAT$1,034.00$1,357.50$323.50
12/24/9814MMM$1,030.00$1,271.38$241.38
12/24/9822IP$958.12$1,086.25$128.13
12/24/989JPM$949.63$985.50$35.88
  Cash: $80.43  
  Total: $4,781.06  

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
The Foolish Four Portfolio was launched on December 24, 1998, with $4,000. Additional cash is never added, all transactions are discussed and explained publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen once per year using a formula based on dividend yield and price. See The Foolish Four Explained for details.