Look for big improvement in funds' 10-year record

Bear market marches into history, making funds that survived the decade seem great on paper

Oct 6, 2017 @ 4:00 pm

By John Waggoner

The next two years are going to be wonderful for a stock fund's 10-year record.

The worst bear market since the Great Depression started ten years ago, on Oct. 9, 2007, with the Standard & Poor's 500 stock index at 1,565.15. When it ended, on March 9, 2009, the blue-chip index sat at 676.53 – a 56.8% loss.

Starting today, the devastating effects of the bear market will roll off a fund's 10-year record, meaning that even if the stock market goes nowhere the next 18 months, a fund's 10-year return will improve dramatically.

Consider PRIMECAP Odyssey Aggressive Growth (POAGX), the top-performing diversified U.S. stock mutual fund since Oct. 1, 2007. It's up 235% through Oct. 1 this year, according to Morningstar. If management were to park the fund's assets in safety deposit vault for the next 18 months, the fund would have produced a 545% 10-year gain, assuming one ignored inflation and had a safety deposit box large enough to hold $8.8 billion – the fund's current assets.

Similarly, the Guggenheim S&P 500 Pure Value ETF (RPV), has gained 121.3% the past decade. But the fund is the top-performing U.S. diversified fund or ETF since March 1, 2009, soaring 594%.

One of the biggest beneficiaries of the next two years – barring a similar meltdown – is Miller Opportunity C, which swooned a mind-melting 76.85% from October 1, 2007 to March 1, 2009. Its total return for the past decade: 27%. Drop off the bear market, however, and the fund is up 452%. "If only we could do that with actual portfolios," said Russel Kinnel, director of mutual fund research at Morningstar.

What can advisers learn about this?

• A full market cycle record – bear to bull – might tell more about a fund's characteristics than the funds' record for the number of times the Earth has rotated around the sun. Probably the biggest props for the cycle has to go to Reynolds Blue Chip growth (RBCGX), which ranks 14th among all diversified U.S. stock funds the past decade. It's up 192%. But the fund lost just 3% during the bear market. Its record won't improve much as the bear market recedes into history, although it should still win the gratitude of its investors.

• A long bull market can do a lot for a growth fund's record. PowerShares QQQ ETF – Qubes, to its fans – tracks the tech-heavy Nasdaq 100 stock index. The ETF has 58% of its assets in technology, and Apple accounts for 11.6% of its holdings. Despite its 46.2% plunge in the bear market, the fund's 478% gain has given it a 211% gain for the past 10 years, putting it in sixth place for the cycle. "We are in a FAANGS era," said Mr. Kinnel. (FAANG stocks are Facebook, Apple, Amazon, Netflix and Google, which have led the market in the recovery.)

• Just as all unhappy families are different, all bear markets are different, too. "You can read way too much into previous bear markets," said Mr. Kinnel. For example, investors jumped into the American funds after the 2000-2002 bear market because they had held up well. They are value-oriented, low-turnover funds. But value stocks got hit hard in the 2007-2009 bear market, which ripped ferociously into banks and industrials, two staples of the value universe.

Don't let the long bull market blind you. "The best way to invest is by recognizing that some funds and ETFs are better for bear markets and some are best for bull markets," Mr. Kinnel said. "Don't read too much into the last two or three years."

Top-performing U.S. stock mutual funds and ETFs the past 10 years, and how they fared in the bear market and subsequent bull market
FundTickerMorningstar Category10/1/2007-9/30/2017 Return10/1/2007 - 3/1/2009 Return3/1/2009 - 9/30/2017 Return
PRIMECAP Odyssey Aggressive GrowthPOAGXMid-Cap Growth235%-48%545%
Brown Capital Mgmt Small Co InvBCSIXSmall Growth228%-37%423%
Parnassus Endeavor InvestorPARWXLarge Growth227%-42%462%
PIMCO StocksPLUS® Small InstitutionalPSCSXSmall Blend221%-50%538%
T. Rowe Price New HorizonsPRNHXSmall Growth213%-49%517%
PowerShares QQQ ETFQQQLarge Growth211%-46%478%
Shelton Nasdaq-100 Index DirectNASDXLarge Growth209%-46%473%
Eaton Vance Atlanta Capital SMID-Cap IEISMXMid-Cap Growth208%-36%381%
Jackson Square SMID-Cap Growth ISDCGTXMid-Cap Growth204%-50%504%
Fidelity® OTCFOCPXLarge Growth204%-49%496%
VALIC Company I NASDAQ-100 IndexVCNIXLarge Growth202%-47%466%
Fidelity® Small Cap DiscoveryFSCRXSmall Blend199%-44%431%
Virtus KAR Small-Cap Growth IPXSGXSmall Growth197%-48%468%
USAA NASDAQ-100 IndexUSNQXLarge Growth197%-47%456%
Reynolds Blue Chip GrowthRBCGXLarge Growth192%-3%201%
First Trust US Equity Opportunities ETFFPXLarge Growth186%-49%461%
Dreyfus Opportunistic Small Cap InvDSCVXSmall Growth186%-42%397%
Monetta Young InvestorMYIFXLarge Growth186%-39%370%
PIMCO RAE Fundamental PLUS InstPXTIXLarge Value186%-58%577%
Janus Henderson Triton DJANIXSmall Growth182%-47%430%
Rydex NASDAQ-100® InvRYOCXLarge Growth180%-47%429%
AMG Managers Cadence Emerging Cos IMECIXSmall Growth180%-54%505%
Fidelity® Growth CompanyFDGRXLarge Growth179%-47%424%
Hotchkis & Wiley Value Opps InstlHWAIXLarge Value178%-57%548%
Nationwide Ziegler NYSEArcaTech100 ANWJCXLarge Growth176%-43%385%
S&P 500 total return105%-50%311%
Source: Morningstar


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