If you think you had it rough last year, imagine being an investor in Legg Mason Opportunity Trust. The fund shed a whopping 65.5% in value in 2008, making it the worst-performing non-leveraged domestic stock fund with at least $100 million in assets.
Wall Street was bad last year, but not that horrendously rotten. Plenty of stock funds managed to bleed just half as badly.
If you don't think the disparity is that big of a deal, work the cruel math required to make an investor whole. A fund that loses 33% of its value needs to climb by 50% to make back the slide. Legg Mason Opportunity Trust, on the other hand, will have to nearly triple in price to get shareowners back to where they were before 2008 began.
So what's in your portfolio, fellow mutual fund investor? How did it get there? What are you doing to make sure that you don't get Legg Masoned this year?
Get to know your investments
Mutual fund ownership is a passive investment for most shareholders. If you enjoyed sweating out the daily tickertape gyrations, you'd just snap up individual stocks and bonds directly. Right?
Owning a fund doesn't require daily -- or even weekly -- maintenance. Leave that up to the fund manager. However, it doesn't free investors from some degree of vigilance. How well you pick the funds in the first place will dictate how active -- or passive -- an investor you will need to be.
Yes, you can get it right the first time. I have a few tips to make sure that you're buying the right funds, borrowing liberally from the strategies that have made the Motley Fool Champion Funds newsletter service successful in singling out market-beating funds.
1. Know your managers
Legg Mason Opportunity Trust isn't managed by a nobody. Legg Mason
Unfortunately, that streak ended in 2005. Every year since then, Miller has grown more out of touch with the market's direction.
|
Value Trust |
Return |
vs. S&P 500 |
|---|---|---|
|
2006 |
5.9% |
(9.9%) |
|
2007 |
(6.7%) |
(12.2%) |
|
2008 |
(55.1%) |
(18.1%) |
Source: Morningstar.
In short, even a celebrated fund manager can fall out of favor. If Peter Lynch -- the fund manager who was the industry's biggest star during his Fidelity Magellan tenure -- returned to Fidelity Magellan, I wouldn't necessarily be a buyer.
Remember -- the efficacy of managers, funds, and strategies all change over the years, and those strategies vary from fund to fund. Make sure you agree with how your fund is being managed -- which brings us to the second point:
2. Know your fund holdings
You're a mutual fund investor because you want someone else to make the calls to buy and sell. More power to you!
However, I always like to look over a fund's top holdings to see how a manager thinks. A quick review will get you up to speed with the actual basket of stocks you're buying. You'll find that information on most fund family websites, in the latest updates, or on third party sites like Morningstar.
For example, Rainier Large Cap Equity is a Champion Funds recommendation from last year. Here's a list of its five largest stock holdings:
-
Total SA
(NYSE:TOT) -
Gilead Sciences
(NASDAQ:GILD) -
Procter & Gamble
(NYSE:PG) -
Kroger
(NYSE:KR) -
PepsiCo
(NYSE:PEP)
It's an easy enough group to understand. Total is an overseas energy play. Gilead is in health care. The next three have a central theme: Kroger runs a successful chain of supermarkets, where its shelves are no doubt stocked with PepsiCo and Procter & Gamble products. (Between P&G's Pringles and Pepsi's Frito-Lay, the fund clearly has it chips on chips.)
Turning over to Opportunity Trust, we see that major holdings include airlines such as United Airlines parent UAL
3. Watch those fees
Last year was wild. The difference between a fund charging 1% or 2% of its assets in management fees may feel like a rounding error when it would have been the difference between a 44% loss and a 45% loss.
But like all exponential metrics, higher fees do add up over time. You may be willing to pay slightly more for a specialized fund like one that invests in a certain niche, or with an emphasis in foreign markets. But don't overpay, especially when you have suitable alternatives that will nickel-and-dime you a little less along the way.
Opportunity Trust's annual 1.19% expense ratio may seem trifling, but the fund charged many of its shareholders an onerous upfront sales "load" of 5.75%!
So who exactly sold you that ridiculous mutual fund?
Owning mutual funds has its benefits -- it's less time-consuming for you, because you don't have to sweat specific buy and sell decisions. But as Opportunity Trust demonstrates, performance between different funds can vary widely. Ultimately, it's your job to pick the right fund.
To recap, among other things, picking a winning fund involves
- Knowing your managers
- Knowing your fund holdings
- Watching those fees
If you're looking for some thoroughly vetted fund ideas, feel free to check out Champion Funds' best ideas, free for the next 30 days. Simply click here to get started.
Longtime Fool contributor Rick Munarriz always owns a mutual fund or two, even in a portfolio of stocks. He does not own shares in any of the companies in this story. PepsiCo, Procter & Gamble, and Total SA are Motley Fool Income Investor recommendations. Legg Mason is a Motley Fool Inside Value pick. Morningstar is a Stock Advisor selection. The Fool owns shares of Procter & Gamble, Legg Mason, and Morningstar. The Fool has a disclosure policy.
