Broker Check

What Have You Done For Me Lately?

| January 26, 2018
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Imagine the year is 2013, the stock market has just come off two great years, and you're looking around at various investment options to complement or replace some of your existing holdings.  Over the prior 20 years, things have lined up about how you would have expected based on history -- stocks beat bonds, and smaller and more value-oriented stocks beat larger and more growth-oriented shares.  The S&P 500 was up 9.1% a year since 1994, while a 50/50 mix of the DFA US Large Value and Small Value Funds did even better: +11.7%!

But why stop at the "asset class" return for small and value stocks?  A small number of active managers were able to compile even better track records, and surely a 20-year horizon is enough to prove skill over luck, right?  Take the FPA Capital Fund, for example.  It targets low-priced value stocks across the market capitalization spectrum, but instead of buying every one, as DFA does, they try to pick the very best of the bunch; classic "active management."  FPA Capital's returns ("Portfolio 1") from 1994-2013 were staggering -- +13.1% per year.  The chart below shows that $100,000 in FPA grew to $1.17M compared to "just" $913K for the entire asset value class (50% DFA US Large Value, 50% DFA US Small Value -- "Portfolio 2").

You've heard the refrain about betting on past performance before (and it's at the bottom of this blog if you've forgotten), but does it really apply to the two-decade stretch of success?  In FPA's case, it sure does.  The chart below looks at the FPA Capital Fund's returns since 2014.  Including 2017, it's been down three of the last four years, and once by double digits.  Investors in the FPA fund have actually lost money since 2014, with a $100K investment now only worth $95K.  This despite the fact that a market-wide portfolio of value stocks (50% DFA US Large Value, 50% US Small Value) has grown over 40% during this timeframe and $100K is worth $140,784.

The last few years have been so bad for FPA that it more than eliminated two decades of outperformance!  FPA Capital has now trailed the 50/50 combination of DFA US Large Value and US Small Value by about 0.7% per year over the last quarter century, just like the other 98% of surviving funds in the value category have done.

Hopefully, this is another reminder of why you shouldn't chase performance and aim for more when the asset class return is available and is likely to be more than sufficient to achieve your long-term goals.  Don't put yourself in a position where you have to ask "what have you done for me lately"?

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Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

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