While you and I have already bid "good riddance" to 2008, the mutual fund industry is about to face its time of reckoning. In the coming days, account holders will be receiving their year-end statements, and it won't be pretty.
Active mutual fund owners already know the score, of course. They saw their fund net asset values tank, especially in the year's final quarter. The December rally was too little and far too late. Now it's time for passive investors to react to the grim news.
This doesn't mean that I foresee a rough 2009 for mutual fund investors. Choose well -- a key caveat in these volatile times -- and you will be just fine.
I have four mutual fund industry predictions for the year ahead. Let me dive right in.
1. Investors will follow the money
In the realm of publicly-traded fund companies, I see T. Rowe Price (NASDAQ:TROW) beating the market. Legg Mason (NYSE:LM) won't be so lucky.
This isn't rocket science. Have you seen the 2008 performance metrics? Legg Mason ran two of this year's worst funds. Redemptions will pick up, compounding a problem that entails charging expense fees on an already diminished asset base.
T. Rowe Price fared significantly better. Through the end of September, 64% of the family's funds were ahead of their respective Lipper fund averages over the trailing year. An even more encouraging metric: 68% of the assets in funds rated by Morningstar (NASDAQ:MORN) were in funds with a rating of four or five stars. Less than a third of the industry's funds qualify for Morningstar's two highest ratings.
2. Morningstar will also beat the market
Speaking of Morningstar, it's easy to see why investors may be spooked away from shares of the fund and stock analyst after shedding 54% of their value last year. The company has missed Wall Street's profit expectations in two of the four previous quarters. Analysts also see a small dip in earnings here in 2009.
Farewell, Morningstar? I don't think so. If anything, this turbulent market is going to encourage fund investors to kick in with a little more due diligence when it comes to their mutual fund choices. This will bode well for Morningstar, as well as newsletter services like our own Champion Funds.
3. Bill Miller will bounce back
I'm going out on a major limb here, but I think Legg Mason's Bill Miller is due to bounce back in 2009.
Miller was a rock star in the industry after his legendary Legg Mason Value Trust thumped the S&P 500 for 15 consecutive years through 2005. The past three years have been brutal, with Miller's fund not only losing to the unmanaged index but actually widening its annual deficit.
|
Return |
vs. S&P 500 | |
|---|---|---|
|
2006 |
5.9% |
(9.9%) |
|
2007 |
(6.7%) |
(12.2%) |
|
2008 |
(55.1%) |
(18.1%) |
Source: Morningstar.
Miller misread the themes, like many fund managers did in 2008. However, he took a bath by banking on some real dogs like travel portal Expedia (NASDAQ:EXPE) and prolific blowups including Freddie Mac (NYSE:FRE) and AIG (NYSE:AIG).
Predicting a turnaround for Miller in 2009 is probably bolder than you think. It's not just because the trend is clearly pointing the other way. His funds will be dogged by redemptions, forcing his hand to unload holdings at what may be an inopportune time. It is hard to make headway in this market if you have to deal with outflows of capital at the same time.
4. International funds will beat their domestic peers
After a disastrous 2008, it's easy to see why investors will want to keep a closer eye on their funds. That will likely lead many account holders to ditch international funds in favor of domestic vehicles with portfolio names they can actually pronounce. Overseas blowups like last week's Satyam (NYSE:SAY) fiasco won't help foster confidence in global and international funds, either.
However, I'm sticking to this prediction. I believe that the growth stocks with the greatest upside reside in emerging markets. I also feel that any continued stateside weakness accompanied by a falling dollar will draw more investors to diversify overseas.
It's no surprise to see nine different global and international funds on the Champion Funds scorecard. Overseas diversification is important in any well-rounded portfolio, and I think it will pay off nicely in 2009.
More Miller time:
