essays pieces of the puzzle
Thursday, April 19th, 2012
the five best

The May edition of Bloomberg Magazine features a section entitled, “The Best-Performing Mutual Funds.”  Here they are, the best in each category that the publication provided.

Frequent readers will know that I don’t go in much for performance derbies, since you can shoot holes in them pretty easily and they incent the wrong behavior among managers and investors.  So, yes, today’s title is sarcastic.

The methodology entailed using the Bloomberg categorization scheme and scoring on a combination of returns for one, three, and five years, plus Sharpe ratios for the latter two.  Share classes weren’t provided — and three of these appear to only have institutional classes.

The chart shows returns from the start of the period for comparison.  In reverse order of performance, the winner in each category:

E) Global equities:  Nuveen Tradewinds Value Opportunities.

D) Global bonds:  Prudential Total Return Bond.

C) U.S. Small Cap:  SouthernSun Small Cap.

B) Diversified U.S. Equities:  Robeco Boston Partners Long/Short Equity.  I have a lot of questions about this one, starting with whether it should even appear in this category.

And, most interesting of all, the “best of the best”:

A) U.S. Bonds:  American Century Investment Zero Coupon 2020.  An outstanding example of how these comparisons can go wrong.  It is a portfolio of zeros, after all, with the target date approaching year by year, after a period that had a big decline in interest rates.  That’s the very definition of something that’s not going to perform in the future as it did in the past.  It’s bond math, zero coupon division.

The magazine even got the portfolio managers to pose for an embarrassing photo with a cheesy trophy.  One of them was quoted as saying that they don’t expect investors to flee, even if rates rise, since many have locked in a rate of return.

Yes, but.  They have a variety of options on how to deal with their early windfall.  More importantly, rankings like these can entice the unwary that haven’t had that benefit.  All they come in with is high expectations and no idea that they have been led astray.  (Chart:  Bloomberg terminal.)

the checklist series

The Checklist Manifesto by Atul Gawande is less than two hundred pages long, and is an interesting and thought-provoking read.  I managed to get five postings out of it — or at least inspired by it, since I tried to convey not just the book’s contents but the kind of ideas it got me considering in regard to investment process and organizations.  A short description of each posting and link to it are found on this PDF summary.