| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR -- THE BARKER PORTFOLIO
So I Said, 'I Can Beat Those Index Funds' Even then, in the fall of '95, I knew it was a long shot. I set out shopping for a mutual fund to beat the broad market--and defeat the growing conventional wisdom favoring index funds most everywhere, most all the time. Compulsively, I scoured past returns, expense ratios, management experience, portfolio turnover, exposure by industry. I pored over magazines, newsletters, prospectuses, even the Western world's dreariest document, the ''Statement of Additional Information,'' something funds file with the feds. Geeky, yes. But even if conventional wisdom is often right, it's rarely any fun. At last, I picked. I bypassed an index fund that had caught my eye and instead split my money evenly between two actively run big-cap funds, Dodge & Cox Stock and Harbor Capital Appreciation. Dodge uses a value approach, Harbor a growth strategy. Which one would prevail over the next few years, there was no way to know. Yet I hoped that together they would beat the market at no extra risk. As you can see from the table, my bet didn't pay off. Each of my funds did well, especially Harbor, with its portfolio full of such technology leaders as Intel (INTC) and Microsoft (MSFT). They nearly made up for Dodge's laggardly value plays, Kmart (KMT) and Union Pacific among them. But not quite: The index fund I shunned, Vanguard Tax-Managed Capital Appreciation, which tracks the big caps in the Russell 1000 index, wound up delivering $837 more on a $10,000 investment than my two-fund portfolio. That edge grew after I subtracted the higher taxes I had to pay on my funds. WILD IDEAS? Given the time and effort I spent picking them, you might think I've gotten religion. You might think I'm about to say you should stash all your dough in index funds. After all, as Vanguard founder John Bogle told me recently, the record shows that the odds of picking a long-term winner are as bad as 1 in 40. That's why I do own some index funds now, including the Vanguard offering I once bypassed. But I'm not yet willing to fall in with the popular consensus that has, by now, grown only stronger. I won't make indexing my sole mutual-fund strategy. And I think you should keep an open mind, too. As chancy as it has proved to select winners from among funds focusing on big U.S. stocks, the odds get better if you're looking to invest in lonelier corners of the stock market--small-company or foreign stocks, for example. By Morningstar's reckoning, just one of Vanguard's four foreign-stock index funds delivered average or above-average returns for the risks they bear. And in the past three years, while Vanguard Index 500 beat 92% of funds in its category, Vanguard Total International Stock Index Fund trailed 70% of its rivals. In time, the relative returns of foreign stock indexing may improve as its inherent low-cost edge piles up. But time, I suspect, will bring something else: innovation. Just as indexing was a wild idea 24 years ago when Bogle created the first such mutual fund, some promising experiments exist today. One is Masters' Select Equity Fund, run by California investment adviser Ken Gregory. Three years ago, he assembled a diverse group of six star stockpickers. Each chips a few of his best investment ideas into the Masters' Select portfolio. Unlike other funds of funds, the portfolio remains concentrated in a few dozen names. Result? Since its inception, it has returned 77%. That was nearly 10 percentage points short of its benchmark, the Wilshire 5000 index. Yet a younger sibling, Masters' Select International, has done a lot better, beating its benchmark by more than 24 points. So the evidence on Gregory's experiment is mixed. Will he ultimately succeed in building a better fund? Will someone else? I can't say, but for all of indexing's virtues, one strategy can't hope to fit every investor's needs. And, heck, sometimes it's just fun to bet a long shot. Questions? Comments? E-mail barkerportfolio@businessweek.com or fax (321) 728-1711 By ROBERT BARKER _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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