Back in September, Alison Southwick and Robert Brokamp reviewed five things that might rightfully lead an investor to dump a stock -- or sell a big chunk of it -- even when there's not necessarily anything wrong with the company or the equity. This week on the Motley Fool Answers podcast, they're back as promised with five more, presented with a bit of help from Million Dollar Portfolio's Jason Moser.
In this segment, they shift from problems that involve individual stocks and companies to take a wider look at mutual funds. When you buy this kind of diversification, you're looking for two things: some safety and a shot at beating its benchmark over the long term.
A full transcript follows the video.
This video was recorded on Nov. 14, 2017.
Alison Southwick: Our fourth breakup line is, "You're just not performing when I need you to."
Robert Brokamp: And here we're talking about bidding adieu to bad funds, and I'll take this one. I'm talking about mutual funds, of course. And generally speaking, if you have a fund that has underperformed a relevant index fund over the last five years, you should probably get rid of it. So, if you own, for example, a large-cap value fund and it has not beaten a large-cap value index fund, there's no reason to continue holding onto that.
And one of the biggest examples -- and this is one that many Fools experienced because this is a fund that was in our 401(k) for many years -- was a fund called the Fairholme Fund run by Bruce Berkowitz. In 2010 Morningstar named him Manager of the Decade. So, from 2000 to the end of 2009, do you want to take a guess at what kind of performance you saw from the average large-cap fund?
Jason Moser: What was the date again?
Brokamp: 2000 to 2009. Basically, the first decade of this century. The average large-cap blend fund.
Moser: I've got to believe it was...
Southwick: It must have been pretty good, right?
Moser: On an annualized basis?
Brokamp: Yes. That included the .com crash and the Great Recession.
Moser: That's right. The Great Recession was in there, too.
Southwick: So 2000 to 2010, the average annualized returns of a large-cap mutual fund.
Brokamp: I'll just tell you: 0.01%.
Southwick: Wait! What?
Moser: Because you had the .com crash and the Great Recession in there.
Brokamp: Right. And by the end of 2009 we were just recovering from that. So basically those funds made no money. Fairholme averaged 13.2% a year.
Brokamp: It did fabulously, so Bruce Berkowitz doing well performing, but also just a smart, articulate guy. Someone you could look at and say, "He's like a young Warren Buffett. Very wise." The type of guy you would want managing your money. Like I said, we had it in The Motley Fool 401(k). I had some of this fund. Then in 2011, the market made only 2%. He lost 32%.
Brokamp: Over the last decade, his fund has been in the bottom 2% of funds. Over the last five years, the bottom 1% of funds.
Southwick: What's his strategy? Do we know?
Brokamp: Well, he became overly concentrated in certain stocks. Some of those did well. Some of them didn't. For example, one that hasn't done well, Sears. Fannie Mae. And the problem is he also was concentrated in AIG, which did well for a while, depending on when you look at it.
But because when a fund starts doing poorly everyone wants their money, it forces the manager to have to sell stocks. And because he had all these preferreds in Fannie Mae that were illiquid, and because he owned so much of Sears, he couldn't sell those without impacting the price of those, so he had to sell all the other things. He was also highly concentrated in a real estate company called St. Joe's down in Florida. So basically, that's what happened.
It's a classic example of how past performance just isn't a reliable indicator of future performance when it comes to a mutual fund, and you have to stay on top of it. And if they're not keeping up over a five-year period, it's time to say goodbye.
Moser: The other thing about the past -- and I really can't emphasize this enough -- think about how different things are now than they were in the past 10, 20 years ago. Technology has just changed everything. So, you can't look back 20 years ago and compare. It's apples to oranges. It's not fair. You have to really hit the reset button and just consider, how do I feel like things are going to shake out in this technology-driven world, because it just wasn't that way 20 years ago.
When I graduated from college, email was just becoming a novel concept. They didn't have internet. It's a little bit of a different story now.