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As the stock market struggles into record territory after a rally that began three years and eight months ago, the average investor is finally joining the feast.
What had been a stock pickers' market, in which a small fraction of stocks benefited at the expense of the many, has broadened out. The Vanguard 500 Index Fund (VFINX), which represents the market average, is once again beating four out of five rivals, as it did in the 1990s but hadn’t done in this decade until now.
The breadth of the gains are obvious at the nation’s 20 largest mutual funds. Together they have assets of $1.47 trillion, or about one in every five dollars invested in all mutual funds, and as they go, so do the fortunes of the nation’s investors, including its retirement savers.
This year, the No. 2 Vanguard 500 Index is ahead 12.1%, as of Nov. 3, and double-digit gains are commonplace among the other largest funds. The throngs of investors who make these funds the biggest are being rewarded for their patience. As memories of the bear market grow cold, average investors and not just market experts are watching their portfolios blossom.
Small funds, big gains
Some small funds -- small because most investors don't own them -- have piled up big gains: Prudent Bear (BEARX) was up 63% in 2002; Jacob Internet (JAMFX) was up 101% in 2003; Matthews Korea (MAKOX) was up 59% in 2005. Together they have less than $1 billion in assets.Vanguard's 500 Index is a fair proxy for the fate of small investors, and it and they hadn't fared well in recent years. Two-thirds of similar, and smaller, funds did better than the index fund in 2000, and 60% managed to do the same as recently as 2005. The fund’s average rank over the trailing five years put it into the 40th percentile, meaning it beat only six similar funds out of 10.
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The big index fund's investors have eked out annualized returns of 6% in the past five years, just half the 12.1% the fund has returned since it was launched in 1976. Similarly, holders of the biggest bond fund, Pimco Total Return Institutional (PTTRX), earned only 5.1% in each of the past five years, 40% less than that fund's average annual return -- 8.4% -- since its inception in May 1987.
The mutual fund that dominated the 1990s as the nation's largest fund, Fidelity Magellan (FMAGX), has been and continues to be a mess. It stinks even as it holds onto $45 billion in assets, proving that P.T. Barnum’s suckers abide among us still.
Morningstar calls Magellan a large blend fund, meaning it holds a mix of large growth and large value stocks. Among funds with similar objectives, Magellan ranks in the bottom 2% this year. Over five years, it ranks in the bottom 10%. This should be plain, but I’ll state it plainly: You are stupid to own this fund.
But Magellan's continued woes are mostly the exception. Most other big funds are racking up solid returns. The largest, American Funds' Growth Fund of America (AGTHX), with an astonishing $147 billion of assets, continues to rank among the top 4% of large-capitalization growth funds throughout the past five years.
Persistence of performance is evident throughout the American Funds lineup. Income Fund of America (AMECX) is ahead a sparking 16.1% this year and ranks, as usual, among the top 5% of its rivals.
American Funds' Investment Company of America (AIVSX), a large value portfolio with $84 billion in assets, is one of the rare American funds that doesn’t consistently rise to the top. It resides currently in the 63rd performance percentile, very near its longer-term position in the 54th rank.
A change of leadership
Some of the biggest funds that have been the most successful in recent years continue to deliver double-digit gains, even as their ranks within their categories have slipped.For example, while American Funds' EuroPacific Growth (AEPGX) is up 16.2% this year, compared with a five-year average of 14.6%, its leadership rank has tumbled to the 81st slot from the 15th. Fidelity Diversified International (FDIVX) has likewise fallen into the bottom half of its group from the top tier.
The return of Dodge & Cox Stock (DODGX) this year -- up 14.5% -- is similarly ahead of its 13.5% five-year average, but the fund has tumbled to the 42nd performance percentile from the third.
This isn’t due to weak management. Rather, as with EuroPacific and Diversified International, it is because the fund’s category -- in this case, large value -- has delivered such abundant returns for so long that the less desirable names owned by rival portfolios have been bid up as investors scramble to share in the group’s success.
For a look at your fund, examine the table below. You’ve probably done better than you have realized. Big funds get big because they perform so well.
The biggest mutual funds (figures as of Nov. 3):
| Fund | YTD | Five years* | YTD | Five years* |
|---|---|---|---|---|
8.4 | 8.5 | 16 | 4 | |
12.1 | 6 | 21 | 40 | |
5.3 | 4.9 | 43 | 12 | |
16.2 | 14.6 | 81 | 15 | |
13.2 | 8 | 63 | 54 | |
14.8 | 7.5 | 38 | 63 | |
16.7 | 12.2 | 13 | 34 | |
11.9 | 7.6 | 28 | 18 | |
16.8 | 16.2 | 22 | 9 | |
16.1 | 10.3 | 1 | 4 | |
9.2 | 11.8 | 13 | 1 | |
12.3 | 6.1 | 18 | 37 | |
14.5 | 13.5 | 42 | 3 | |
9.2 | 7.7 | 31 | 15 | |
14.9 | 11.7 | 45 | 38 | |
15.1 | 11.7 | 2 | 2 | |
13.7 | 9.8 | 55 | 23 | |
4.8 | 3.4 | 98 | 89 | |
| Vanguard Wellington (VWELX) | 12.11 | 8.9 | 8 | 9 |
| Fidelity Diversified International (FDIVX) | 16.6 | 16.8 | 54 | 7 |
*Annualized
Sources: MSN Money, Morningstar
At the time of publication, Tim Middleton owned the following securities mentioned in this article: Fidelity Contrafund, Dodge & Cox Stock.
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