Some Fund Managers Are Better Off Ignored

Uh-oh. Mutual fund managers have gotten considerably more pessimistic about the market. We shouldn't let that alarm us, though, because it's not very useful information. Many fund managers are not the geniuses you might think they are. And even if they're right, it's still not the worst news.

Fund managers' growing bearishness was reflected in a recent Bank of America Merrill Lynch survey. It found that a net 12% of managers surveyed expected the world's economy to get worse over the coming year, which is markedly more pessimistic than last month, when the score was a positive 24% in favor of the economy strengthening.

Here's why you shouldn't fret about it too much, though: Just as the average American isn't the best assessor of our economic condition, neither are fund managers. They're not all geniuses. Check out how uninspiring some funds are. The two examples below are from a Forbes list of the worst-performing funds of the past decade.

  • The First American MidCap Select A (FATAX) fund has underperformed its mid-cap benchmark over the past three, five, and 10 years. Its managers say they look for companies with strong or improving business fundamentals and attractive valuations. Yet some of the stocks those managers have selected don't seem to fit that bill. There's Abercrombie & Fitch (NYSE: ANF  ) , which has been lavishly compensating its CEO while revenue has shrunk, and which seems, at best, just fairly valued these days. It also has held arguably overvalued shares of Office Depot (NYSE: ODP  ) , which has been a value-loser over the past decade, having trouble competing against Staples. The fund dumped those two stocks between April 30 and June 30, but it's not clear whether managers sold in time to avoid some big losses in recent months.
  • The Turner Concentrated Growth Investor (TTOPX) fund has also been a long-term underperformer. In choosing stocks, management looks at fundamental factors such as earnings growth and valuation, technical analysis, and performance in relation to earnings estimates. It seems to be ignoring many fundamental concerns, though, when it owns shares of salesforce.com (NYSE: CRM  ) , a customer-information, cloud-computing specialist that has performed so well that its price-to-earnings ratio tops 140. Moreover, it's questionable whether Las Vegas Sands (NYSE: LVS  ) , which is saddled with lots of debt as well as properties in Vegas, where times have been tough lately, can sustain its stock's red-hot performance going forward.

Of course, it's natural that for just about any stock, there will be those who believe in it and those who hold their nose. But given that there are so many promising companies on the market, it can be hard to maintain confidence in managers who choose companies you'd avoid. Underperforming managers are not the exception, either: The vast majority of stock funds fail to outperform the overall market over most time frames.

So next time you hear statistics from mutual fund managers, take them with a few grains of salt. Remember, too, that even if this newly bearish sentiment turns out to be correct, there's a silver lining: A depressed market gives us more chances to snap up bargains.

Here are some stocks to examine if you expect the market to swoon -- they can deliver even in tough times.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. salesforce.com is a Motley Fool Rule Breakers selection. Staples is a Motley Fool Stock Advisor recommendation. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


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  • Report this Comment On July 20, 2010, at 3:55 PM, mipakaco wrote:

    Maybe you shouldn't be so negative re: Las Vegas Sands. Those "Vegas properties" you mention compose about 10% of their business. The other 90% that you fail to mention, is in the red hot Asian markets (Macau, Cotai Strip, and Singapore). Those who haven't "held their noses" as you put it, have enjoyed an 1800% gain (so far) since last years March lows. How many stocks in your portfolio can claim that kind of return? With Marina Bay Sands now online (most analysts say this will be the most profitable casino in the world), the gains for LVS shareholders still have a lot of room to run.

  • Report this Comment On July 21, 2010, at 9:23 AM, gimponthego wrote:

    Macao is where the money will pour forth from. Vegas? It will always be there through good times and bad. Look at the properties Mr. Wynn owns just in Las Vegas! When the tunnel from mainland China to Macao is finished, it will be like the causeway from Saudi Arabia to Bahrain on a Wednesday night! Bumper to bumper Bentleys, Rolls, etc. looking for Jack Black and a Red Head...only it will be 24/7 non stop and, you can do some gaming. I take issue with anyone who lacks the foresight that money machine will generate! I'm trying to be a respectful Fool..but questioning LVS?!

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4/17/2014 4:03 PM
ANF $35.62 Down -0.20 -0.56%
Abercrombie & Fitc… CAPS Rating: *
CRM $56.10 Up +0.12 +0.21%
Salesforce.com CAPS Rating: *
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ODP $4.05 Up +0.11 +2.79%
Office Depot CAPS Rating: *

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