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One year ago I crawled out on a limb and designated four mutual funds I believed would be this year's best performers.
I didn't get all four right.
In fact, I didn't get three right, or two, or even one. The market soundly beat them all, and one actually lost money.
I was so profoundly wrong mainly because I made two big bets on government. I lost both of them.
In Japan, I mistakenly thought the economic reforms of the former prime minister, Junichiro Koizumi, would succeed. At home, I thought new Federal Reserve Chairman Ben Bernanke would overdo interest-rate increases and plunge the nation into recession. He did not.
If there's a silver lining around my mistakes, it's that the investment climate this year was far better than I feared. That bodes well for the stock market rally that began in mid-July. That's if you want my opinion, which, after reading what follows, you may not.
Bad calls all
In my forecast last year, I predicted these 2006 winners: American Century Target Maturity 2025 (BTTRX), PowerShares WilderHill Energy (PBW), T. Rowe Price Japan (PRJPX) and Permanent Portfolio Aggressive Growth (PAGRX). Here's how they fared:American Century Target Maturity 2025 has advanced a miserable 2.7% this year, as of Nov. 30. The fund owns nothing but zero-coupon Treasury bonds maturing in 19 years, and therefore is a pure play on the direction of interest rates. If they are headed lower, as they would in a recession, this fund would soar.
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Since it didn't, it's clear the market is satisfied we are in a period of "soft landing" engineered by the Fed to combat an overheated economy, particularly in the formerly red-hot housing sector.
The Fed took the heat away by ratcheting up interest rates between June 2004 and June 2006. A year ago, I suspected Bernanke would force further rate increases beyond the 5.25% peak this year.
Inflation remains an official Fed worry; the current rate of 2.4% is above the central bank's goal of 1.75% to 2%. But with the economy clearly slowing – gross domestic product growth has contracted to around 2.75% from 3.9% in 2004 -- future inflation is less likely. Long-term interest rates have been unruffled.
PowerShares WilderHill Energy is up 11.9% this year, but that trails the S&P 500 Index ($INX) by more than two percentage points. Worse, the average natural-resources fund has slightly outperformed the market.
WilderHill tracks what is called the WilderHill Clean Energy Index. Overall, the energy business generates an awesome amount of pollution. WilderHill and other green funds invest in renewable resources, such as wind and solar, rather than extractive resources, such as oil and coal. I thought higher energy prices would force customers to look for alternatives such as these.
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The ABCs of mutual funds. Here's some help sifting through the alphabet soup of mutual funds to find the best type for you. Click here to play the video.
Unfortunately, as the Economist wryly noted last month, "The flood of money into clean energy is better news for society than it is for investors." Even with massive government subsidies, literally Quixotic schemes like windmills don't pay a decent return on capital.
T. Rowe Price Japan is down 6.7% this year and trails the foreign-stock benchmark, the EAFE index, by nearly 30 percentage points.
I don't blame David Warren and Campbell Gunn, managers of this fund: The Japanese market corrected sharply this year, as Koizumi was succeeded by Shinzo Abe and as North Korea replaced the economy as a prime concern of the Japanese government.
I remain a believer in international investing, but not in a single-country fund like this.
My final pick one year ago was Permanent Portfolio, which is ahead only 8.6% this year. I like this fund so much I devoted an entire column to it last month, but it certainly hasn't delivered the kind of returns I expected.
The reason is that the U.S. economy has just done too well. Permanent Portfolio owns things like gold and Swiss bonds, so it's basically a refuge from the stock market. But this has been a market to be in, not to avoid, so Permanent has been left behind.
It's quite possible that these same four funds will be the ones to own in 2007. Construction represents a huge chunk of the economy, and if new-home sales continue to slow, our "soft landing" could become a crash. Then the Fed would cut rates, bonds would soar, stocks would wither as earnings went bust and so on.
But that's not an official prediction. My official prediction is that a well-diversified portfolio will be what to own in 2007, just as it is in every other year.
At the time of publication, Tim Middleton didn't own any securities mentioned in this article.