Evaluating Mutual Fund Predictions

After nailing 3.5 of my four calls for the mutual fund industry in 2009, I tried my hand at some new predictions last January for 2010.

It's certainly been a challenging year. It was easy to make bullish calls in 2009 when everything seemed to move higher, but 2010 has delivered a better mix of winners and losers.

I hate to give away the ending, but I didn't do so hot. Let's go over the three calls for 2010.

1. Bill Miller will beat the market in 2010
After a three-year rough patch for Legg Mason's (NYSE: LM  ) Bill Miller -- including watching over a couple of the worst-performing funds of 2008 -- Miller bounced back in 2009. But the nearly 41% gain at Miller's flagship fund -- Legg Mason Value Trust (FUND: LGVAX  ) -- in 2009 was only enough to earn back roughly half of what it lost during its 55% plunge in 2008.

I felt that Miller was going to continue his comeback in 2010, but … no. The fund's 6.7% return through the past 12 months has fallen short of the market's double-digit returns.

Year

Return

Percentage Points Above (Below) S&P 500

2006 5.9% (9.9)
2007 (6.7%) (12.2)
2008 (55.1%) (18.1)
2009 40.6% 14.2
2010 6.7% (8.4%)

Source: Morningstar.

It's sobering to see a guy who had beaten the averages in each of the 15 prior years come up sorely short against the market in four of the past five years.

Legg Mason is certainly taking matters seriously. It announced that Sam Peters would be Miller's heir apparent early last year, and tapped him as the fund's co-manager two months ago. It's an unfortunate move for Miller's legacy, since the potential of the iconic's fund recovery in 2011 can no longer be attributed to Miller alone.

2. Morningstar will beat out Value Line
In a call that worked out substantially better, I predicted that Morningstar (Nasdaq: MORN  ) would deliver healthier returns than Value Line (Nasdaq: VALU  ) . Both public companies provide mutual fund analysis, but I believed that Value Line was still trying to exorcise the demons of earlier indiscretions.

Value Line had its problems several years ago, using affiliated brokerages that allegedly bilked fund investors when Value Line pocketed trade commission rebates. It ended the practice in 2004, and settled with the SEC two years ago without having to admit culpability (though the $43.7 million settlement says it all).

Morningstar has had an ethically cleaner path, and I think appearances do matter to individual investors seeking ideas and guidance.

I nailed this one. Morningstar's 9.9% dividend-adjusted gain in 2010 didn't exactly set the world on fire, but Value Line's dividend-adjusted decline of a whopping 41.2% made it an easy relative victory.

3. Mutual fund companies will beat the market in 2010
My third and final call involved the fund operators themselves. After a robust 2009, I figured many new investors would trickle back into the market in 2010 through managed mutual funds.

Well, this was largely the case, but I flew too close to the sun in singling out three operators that I felt would beat the market -- Janus (NYSE: JNS  ) , T. Rowe Price (Nasdaq: TROW  ) , and Invesco (NYSE: IVZ  ) .

Let's check the tape.

Company

12/31/09

12/31/10

Change

Janus $13.41 $12.97 (3.3%)
T. Rowe $52.16 $64.54 23.7%
Invesco $22.99 $24.06 4.7%

All returns adjusted for dividends.

Sadly, only T. Rowe Price beat the market averages in 2010.

Given its own shenanigans in the past, I should have applied the same rules to Janus that I did to Value Line. I shouldn't have put so much weight on Invesco being a major player in the ETF space with PowerShares, since 2010 was the year when even discount brokers began to align themselves with freshly launched ETFs for commission-free trading.

Add it up
So where does that leave me? I blew the first one, nailed the second, and only hit a third of my final call. I'm certainly not happy with going 1 1/3 out of 3 last year, but I'll be back next week with industry predictions for 2011.

Maybe my crystal ball just works better during odd-numbered years.

Do you have any mutual fund predictions for 2011? Share them in the comment box below.

Morningstar is a Motley Fool Stock Advisor selection. The Fool owns shares of Legg Mason, Morningstar, and T. Rowe Price Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz invests mostly in stocks but always has a mutual fund or two in his portfolio. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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