Would you invest in a mutual fund that trailed more than three-quarters of its category over the past year? Slumps are common even among the best stock pickers—85% of funds that beat their benchmark indexes over a 10-year period had at least one three-year period in which they underperformed their benchmark by one percentage point or more. And in a new study of 2,862 diversified, actively managed US stock funds by S&P Dow Jones Indices, of those funds that ranked in the top quarter for an initial 12-month period, only two funds remained in the top quarter in each of the four subsequent 12-month periods. Some top funds are temporarily hurt as they ratchet up their cash holdings because they consider stocks to be overvalued. Others invest in companies that ran into trouble but are expected to rebound or are in out-of-favor sectors that require some patience before they take off.
Two funds that have trounced the S&P 500 over the past 10 and 15 years but have stumbled recently…
Homestead Small Company Stock (HSCSX) invests in small-cap stocks that the manager believes to be undervalued. Setbacks for several of its major holdings, including Texas Capital Bancshares, Rofin-Sinar Technologies (which makes lasers) and Francesca’s Holdings (a chain of retail boutiques), have hurt returns. It lost 0.33% this year through July 25, compared with an 8% gain for the S&P 500, but it was in the top 5% of its category over the past five- and 10-year periods.
Mairs & Power Growth (MPGFX) has sagged because of its focus on out-of-favor industrials and lack of exposure to utilities, which have been market leaders this year.
It gained just 4% this year through July 25 but has beaten the S&P 500 over the past three-, five-, 10- and 15-year periods.