The panelist on CNBC’s Halftime Report today mentioned we’re currently in a stock picker’s market. A stock picker’s market is one where money managers actively pursue strategies that will outperform the indices. They’ll try to cherry pick winners and avoid losers by employing several techniques such as charting and timing.
After the show ended, I searched Morningstar’s database looking for funds with a high turnover and a 5-year track record. What does turnover mean? A fund with a turnover of 100% will replace its entire portfolio over a 12-month period.[1] The average mutual fund has a turnover of 130%.[2] The three funds I found have an average turnover of 3,775% – that’s a lot of stock picking!
Rydex S&P 600 Pure Value Fund (RYSVX) has an annual turnover of 1,832%. The initial fee to purchase this fund is 4.75% and the ongoing expense is 1.53%. A few of the holdings are Finish Line, Barnes & Noble, and Zumiez. This fund has underperformed the S&P 500 on a 3, 5, and 10-year basis. In 2008 it dropped 43.64%. A $10,000 investment in this fund five years ago is now worth $13,662. The average annual return has been 6.43%.[3]
Salient Tactical Plus Fund (SBTAX) has an annual turnover of 3,584%. The initial fee to purchase this fund is 5.5% and the ongoing expense is 1.98%. It currently owns four investments. It has underperformed the S&P 500 on a 1, 3, and 5-year basis and it’s trailing the market in 2018. A $10,000 investment in this fund five years ago is now worth $12,016. The average annual return has been 3.74%.[4]
PSI Strategic Growth Fund (FXSAX) has an annual turnover of 5,910%. The initial fee to purchase this fund is 5.75% and the ongoing fee is 2.31%. It owns 8 investments or twice as many as Salient. It has underperformed the S&P 500 on a 1, 3, and 5-year basis. This year it’s down almost 15%. A $10,000 investment in this fund five years ago is now worth $9,225. The average annual return has been a negative 1.6% per year.[5]
By comparison, the Vanguard 500 Index Fund (VFINX) has an annual turnover of just 3%. It doesn’t have a sales charge and the ongoing fee is .14%. It has generated market returns since 1976, minus its miniscule fee. A $10,000 investment in this fund five years ago is now worth $18,274. It has generated an average annual return of 12.82% per year.[6]
I hope we’re not in a stock picker’s market if these funds are an indication of one. Funds with high turnover and excessive fees should be avoided at all costs. Instead, look for mutual funds that generate market returns such as the Vanguard 500 Index Fund.
Investors regularly try to outperform the market by utilizing tools, tricks, and trading only to fall short time and time again. Rather than trying to find a market beating strategy focus on your financial plan and invest in low-cost mutual funds. It’s okay to grow rich slowly.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
June 22, 2018
Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.
[1] https://www.investopedia.com/articles/mutualfund/09/mutual-fund-turnover-rate.asp, Stephan Abraham, April 23,2018.
[2] Ibid
[3] Morningstar Office Hypothetical Tool
[4] Ibid
[5] Ibid
[6] Ibid