Why do mutual funds get prizes for losing money?

The 2009 Lipper Awards for the best mutual funds of last year were given out last week. Here’s the list of winners. While one of my colleagues at Money Magazine finds it pretty ironic that awards were given to funds that actually lost money in 2009, it doesn’t really bother me. money-prize-by-taroslav-b

The Intrepid Small Cap fund, for example, lost 7.1% last year. That’s pretty bad, but it’s more than 25 percentage points better than the small cap category as a whole. The bottom line is that small caps were a bad class of stocks to be in last year. The best decision you could have made (though no one could have seen this at the time) was to avoid small caps altogether. But unless you’re in an actively managed balanced fund, that seems like the kind of decision you should have made, not the fund manager. If the small cap category returns a positive 20% this year, you’d better believe that investors would be mad as hell if their small cap fund manager had moved a lot of the fund’s money to cash because he thought there were dangers in the sector. (Ironic disclosure: Intrepid has 7.5% of its money in cash, which is actually quite a lot. I wonder if that cushioned their losses last year.)

To easily see how your mutual funds are allocating their money, check out Morningstar. Most features on the site are free but might require registration.

Another useful tool whose founders I recently spoke to is Mutual Decision. Take a gander at the “Active Share” tool which will show you how active your “active” mutual fund manager really is by comparing his investments to those of his benchmark. After all, there’s no reason to pay a manager 2% a year if he’s mostly just following an index. The site (which costs money but has a free trial) was founded by a few college professors at Georgetown and Rutgers. They basically take academic studies on mutual funds and develop tools that allow investors to apply those studies to their investments. Interesting stuff, but I’d stick to the free trial until its proven that using the tools can actually save you money.

– Joe Light


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