With scads of retirement money currently flooding into mutual funds, tens of thousands of confident MBAs ready and willing to call the shots, plus a perpetual flow of sophisticated portfolio management software tools, you would think there would be a fund that could consistently outperform the S&P 500 index.
It is close to a year since the most remarkable winning streak in fund history ended. At the close of 2005, the
Legg Mason Value Trust (LMVTX), under the stewardship of the legendary Bill Miller, had rung up a streak of 15 years of annually outperforming the S&P 500 total-return index.
Miller's record included negative years where his fund's loss was of lower magnitude than the S&P's. As motivation to contenders for his title, Miller's unprecedented streak is presented in an adjoining table.
The Legg Mason Value Trust's current largest holdings are
TheStreet.com Ratings queried its database of open-end mutual funds to see if any were poised to replicate at least a decade of annual returns surpassing the S&P.
Thirty stock and hybrid funds in the accompanying table have outpaced the benchmark S&P in each of the past eight years, plus this year through Nov. 19.
But, with one debatable exception that we will get to later, none currently has a longer winning streak. So no fund will be able to claim an uncontested 10-year winning streak vs. the S&P until the close of trading on Dec. 31, 2008.
Of course, the funds will have to outpace the S&P for another 13 months before they can claim membership in the 10-year club. Given the market's erratic gyrations in recent months, it's a safe bet that far fewer than 30 will make the cut.
As befits the current investment fashion, 21 of the 30 potential 10-year streaks have, in whole or in part, international investment focuses. With a total of three global and an equal number of non-U.S. funds, the
group leads the management companies in number of prospects on the list.
Also reflecting the times, three funds with investment objectives in energy and natural resources reside in the group.
Because mutual funds' total returns are computed by assuming that
dividends as well as capital gains distributions are reinvested in the funds, for purposes of accurate comparisons the performance data on the S&P 500 gauge also assumes reinvested dividends.
What about the aforementioned "debatable exception" to no fund having a winning streak of more than eight years plus 2007 to date vs. the S&P?
American Funds New Perspective R2 (RNPFX) has outperformed the S&P 500 total-return index annually for the past nine calendar years and holds a comfortable lead over the market gauge for 2007 to date -- at least its R2 class, which charges a lower expense rate than other share classes does.
There's one problem: RNPFX only came into existence on May 15, 2002, barely five and a half years ago.
In recent years, many newer, specialized "classes" of an existing fund were created, with the newer entries sharing identical portfolios with the corresponding original share classes. The
Securities and Exchange Commission
allows the newer classes to calculate what their performances would have been prior to their initial offerings.
They must base it on the performance of an older class of the same fund, but with the newer fund's performance calculated using its unique stated expense schedule and not the older fund's historic expenses.
The fund's performance for the calendar years 1998 through 2002 is what is termed "prepending" in the fund industry. The nearby table shows that the A shares class of
American Funds New Perspective (ANWPX), which has been around since March of 1973, missed beating the S&P by 12 basis points (0.12 percentage points) in calendar 1998 and then handily thumped the benchmark in succeeding years -- including 2007 to date.
The use of this "prepended" performance allows prospective buyers of the newer classes to evaluate longer performance horizons than would otherwise be possible.
The R2 class of the American Funds New Perspective fund was created for large retirement plans; therefore, its total expense ratio is currently 0.51%, compared with 0.74% for the A class. The differential in expense ratios was enough to lift the R5's prepending calendar 1998 performance from the "A" class' slim deficit to a slight surplus over the S&P's gain for the year.
Then, like the ANWPX "A" class, the R5 trounced the S&P in succeeding calendar years as well as for 2007 to date.
The RNPFX and ANWPX funds share an identical investment portfolio, the biggest holdings of which are
So to the unending debates about whether Barry Bonds' home run records and Joe Namath's passing totals in the old American Football League should have asterisks, we add the controversy of whether the "phantom" prebirth results of RNPFX really qualifies the fund as having 10 calendar years of S&P-beating performance.
And for those preserve investors who might be curious as to whether any funds are in line for records of 10 consecutive years of underperforming the S&P 500: None are in line to do so other than S&P 500 index funds. Since the index funds aspire to replicate the S&P, minus fund expenses, they would be expected to constantly underperform the gauge by a slender margin.
Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.