"Performance chasing" as a strategy for selecting mutual funds is seldom if ever a good idea. In 2008, it was a disaster.
Subscribers to "trend following" investment techniques need only look at the accompanying table for compelling evidence that the strategy can easily lead to disaster.
The table includes the 21 non-leveraged retail stock mutual funds that gained more than 50% in 2007. The momentum of each collapsed, unable to withstand the grasp of the 2008 bear market.
Not only did each of the funds fall victim to the downdraft, but each sustained a loss of at least 10 percentage points worse than the 37% setback suffered by
total-return index. All but one tumble took double-digit percentage hits during the year's brutal fourth quarter.
In every case, the inertia from 2007 failed to provide enough resistance to the subsequent collapse to enable the fund to finish the two-year stretch with a positive overall return.
Often masked in euphemisms such as "momentum investing," performance chasing is seldom profitable for the long term; and it can be especially destructive at major junctures in the market.
In 2007, the funds on the list might have seemed irresistible to many investors. It is hard to see how Asia could head anywhere but higher -- especially China. "BRIC" funds that invest in Brazil, Russia, India and China were the fashion of the moment. Natural resources, especially energy, would benefit forever from constantly rising demand by industry and consumers. Uber-manager Ken Heebner's inspired short sales would immunize his
CGM Focus Fund
from market setbacks.
It didn't work out that way, and investors are forewarned that hopping aboard the latest market fad is more likely to lead to disaster than success.
Richard Widows is a senior 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.