Page 138

138

strategies to chase the returns of other investment styles. For example, when small company fund managers forecast a slump in small company stocks, they may start buying large cap stocks in hopes of beating small cap benchmarks. As you will see, more than half of actively managed funds utilize investments that do not reflect their stated objectives.

The Elements Of Style The next three charts reveal the difficulty of identifying a winning style in advance. Figure 6-1 displays the Annual Returns of 13 Asset Class Indexes for the 20-year period from 1994 through 2013 and shows that high and low returns of key market indexes follow no discernible pattern. Figures 6-2 and 6-3 show the same is true for the historical returns of various countries and industrial sectors. Investors who attempt to overweight or underweight specific styles based on speculation about future market movement undermine their ability to achieve the risk-adjusted returns that result from maintaining a proper asset allocation made up of a consistent blend of investment styles.

Style Drifters In the 1980s, Fidelity’s Magellan fund and its then-manager Peter Lynch were touted for outpacing the S&P 500 Index. However, Lynch had achieved his big returns by concentrating a large portion of the fund’s holdings in small cap stocks. In so doing, his investors were unwittingly exposed to a higher level of volatility that may not have been in line with their investment

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

Read more
Read more
Similar to
Popular now
Just for you