Salient to Investors:
Matt Schreiber at WBI Investments says limiting losses is critical to keeping with your investment plan.
Morningstar says 40 of the 2,600 non-sector stock mutual funds it tracks have lost money in the 12 months through April 2013.
Zheng Sun and Lu Zheng at University of California, and Ashley Wang at the Fed found that of the 5,000 hedge funds studied from 1994 to 2011, the funds with the best returns when markets were up did not necessarily outperform over the following year, while the funds that lost the least when markets tanked tended to keep outperforming the market. The top 20% of hedge funds that performed the best in down markets outperformed the returns of the bottom 20% of funds by 5 percent over the next year. Sun said if who is good and bad is not obvious when times are good, then it is best to focus on the downside.
David Vincent at Fred Alger Mgmt recommends against simply buying funds with the lowest downside-capture ratios, because a fund can achieve a low downside-capture ratio by keeping a lot of cash. Vincent recommends divide a mutual fund’s upside-capture ratio by the downside ratio. 1,503 of 2,547 stock funds monitored by Morningstar have captured more of their benchmarks’ downside than upside over the past 5 years through April, while only 233 had an upside/downside capture ratio greater than 1.1.
The most proven indicator of future returns continues to be low fees and the easiest way to minimize costs is to dismiss active managers and use low-cost index funds.
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