Investors: Are You Guided by Current Information?

by Gerald H. Carnes Jr., MBA, CPA
Pursuit, November 2007

Wall Street firms and the investment management industry continue to amaze investors with an impressive range of new products and promotions. In the wake of 9-11, they promoted guaranteed index annuities, exchanged traded funds, index mutual funds, and hedge funds. These products, all readily available before 9-11, suddenly became “hot” new offerings and were indeed, suitable to the investment climate. As the markets recover thru 2007 and global competition increases, innovative products continue to thrive. Hedge funds, index mutual funds, and exchange traded funds have grown exponentially. Other new concepts have been prominent during the recovery. These include dividend weighted funds; fundamentally weighted funds; private equity funds going public; public equities going private; hedge fund investing to control public companies; private equity investing to control public companies; and more.

Where will it end? Most likely, these trends will never end. Therefore, the best option for investors and financial planners is to continually update their investment knowledge base. Ideally, this process should occur daily. However, for most investors, less frequent updates are more realistic.

Investors can benefit by becoming aware of various performance measures. For example, some investors may be surprised to know that during the last three-year, five-year, and ten-year investment periods, both European mutual funds and indexes have outperformed the Standard and Poor’s (S&P) 500 Index. In addition, Indian mutual funds have significantly outperformed Chinese mutual funds. Also during these periods, U.S. value stocks have outperformed U.S. growth stocks, and U.S. mid-cap stocks have outperformed the composite large-cap stocks.

When formulating asset allocation plans, investors should understand which sectors add true diversity to a portfolio by providing strong performance that is not correlated to the overall equity market. Examples of industries in this category include real estate and healthcare. The Fidelity Real Estate fund has a Beta of less than 1.0 and R2 of 25 to 30. The Vanguard Healthcare fund also has a Beta of less that 1.0 and R2 in the 30s. This equates with less volatility and little correlation to the general market. On average, both funds have significantly outperformed the S&P 500 Index over the last 20 years. Bond funds are typically included in asset allocation plans for diversity, but investors may be interested to know that a Government National Mortgage Association (GNMA) fund typically carries less risk than an Intermediate Bond fund with a comparable or slightly better earnings performance.

Despite the annual development of new products, great investment value may be achieved by studying the historical performance of various sectors, industries, market capitalization sizes, and global sectors. This analysis typically leads investors to the conclusion, “the more things change, the more they stay the same.”