Your Stocks Are Down More Than The S&P 500. Admit It.
The stock market is having its worst stretch since the 1930s, but as bad as it is, foreign markets across the board are faring much worse.
Those who have viewed MAXfunds' fund data pages or Our Favorite Funds lists from time to time over the last year may have wondered why most emerging market funds have negative forecasts for future performance and lousy metrics (or why we sold our emerging market fund picks from our Powerfund Portfolios in recent years).
Long time MAXfunds.com readers will remember we had similar negative ratings on most tech funds in 2000. The rationale then and today was the same.
Our fund metrics are designed to help fund investors avoid funds that are likely to fall - the very funds attracting the most money after posting big returns. Most fund ratings and rankings only direct attention to the overvalued - they encourage performance chasing.
The reason we have used this anti-performance chasing methodology is to help you avoid the inevitable result of buying into popular funds and categories: below-market returns.
An article that appeared this week in the Wall Street Journal describes the carnage experienced by the throngs of fund investors who flocked into international markets in recent years. The only difference between this after-the-fact article and the ones published in 2002 is then it was tech and growth funds that were falling faster than the S&P 500 - the very funds that brought in the most money before the drop.
The average diversified foreign stock fund, which invests primarily in developed markets, is down 33% since the start of the year through Friday, versus a 25.5% decline for the average diversified U.S. stock fund, according to Morningstar Inc.
It's even worse in less-established foreign markets. The average emerging-markets stock fund, which includes funds dedicated to China, India and Latin America, is down 42.5% so far this year.
This is a sharp reversal from the heady gains of recent years. In 2007, the average emerging-market fund gained 40%, while the average foreign developed-market fund gained 12%.
On Monday, some European markets had their worst decline in 20 years. Britain's FTSE 100 index fell 8%, while France's benchmark CAC-40 index fell 9%, the largest one-day declines for both markets at least since 1987. Also on Monday, stock trading was halted repeatedly in Russia and in Brazil, where shares registered declines of 19% and 5.4%, respectively. Asian markets fell as much as 6%, but they have been hit worse than European markets since the start of the year.
Mutual-fund investors have piled into foreign markets in recent years partly to diversify their portfolios. Some $463 billion in net contributions poured into these funds from 2003 to 2007, boosting assets to $1.48 trillion at the end of 2007, according to Morningstar."
The more things change, the more they stay the same...
Interesting perspective. I'm confused about this though...
"Our fund metrics are designed to help fund investors avoid funds that are likely to fall - the very funds attracting the most money after posting big returns. Most fund ratings and rankings only direct attention to the overvalued - they encourage performance chasing."
...seems to contradict with the fact that investors have already fled from these funds to what they perceive as safer funds (hence the bigger drop in foreign markets than the S&P). Your methodology must assume that there will continue to be flight from these funds and these markets will continue to drop while the US markets rebound?
Also, it is rather interesting that the dollar has strengthened recently vs. many other currencies. Does your methodology account for the amount of dollars the US is pumping into the system may have a long-term adverse effect on its comparative position. That is, could the return expected on US stocks be tempered or negated by the fact that US dollar's position is at risk of being debased by the amount being pumped into the system?