Specialized Funds Fail Investors

Noncore funds have been used poorly for years, but there are signs of hope

John Rekenthaler 20 December, 2016 | 15:50
Facebook Twitter LinkedIn

As a first approximation of the truth, it’s fair to state that specialized funds are useless. By “specialized funds,” I mean any funds that are not core holdings. Examples include sector funds, regional or country funds, niche bond funds, and most alternative-investment funds. By “useless” I mean that such funds do not make money for their shareholders. They might perform well on paper, but they fail their owners in the real world, because investors typically buy those funds high and sell them low.

The relative performances of these categories, of course, vary over time. To thoroughly mix the metaphor (and split the infinitive), a given category periodically bubbles to the surface by posting relatively high returns. After that happens, people write articles about those funds. Fund companies promote their wares, informing us about how their offerings are strategic investments that belong in everybody’s portfolio. Clients inquire. Advisors listen.

Submerging Markets

And then, before we know any differently, it’s the mid-1990s. Emerging-markets stock funds are at top of the pot. Tens of thousands of advisors have put emerging-markets funds to their clients’ portfolios. Investors who buy their funds directly have also become interested. Fidelity launched its first emerging-markets fund in 1990; by the middle of the decade, Vanguard and then T. Rowe Price had joined the party. Firms that viewed themselves as cutting edge, spurred by overeager members of their investment committees, added emerging-markets funds to their plan lineups.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free
Facebook Twitter LinkedIn

About Author

John Rekenthaler  is vice president of research for Morningstar.

© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy