Personal Investing

Stock Funds Hit a Rough Patch


Only two of the nation's 10 biggest actively managed equity funds are beating their benchmarks this year, and both are from Fidelity. The fund company's Contrafund (FNCTX), with $63 billion in assets, gained 0.3 percent this year through June 3, edging out the Standard & Poor's 500-stock index by just over half a percentage point during that period, according to Bloomberg data. The $32 billion Fidelity Growth Company Fund (FDGRX) rose 2.5 percent, beating its benchmark, the Russell 3000 Growth Index, by 2.6 percentage points.

The worst performer in the big 10 relative to its benchmark was the $37billion Vanguard Windsor II (VWNFX), which fell 2.2 percent, trailing the Russell Value 1000 by 3.5percentage points. The tepid showing of the most popular mutual funds comes after investors pulled $239 billion from domestic stock funds from 2007 through 2009, according to the Investment Company Institute. "It doesn't help if what you're selling isn't working," says James H. Lowell III, chief strategist at Adviser Investments in Watertown, Mass.

Over the past five years, an average of 44 percent of large-company U.S. stock funds have beaten their indexes, according to data from Morningstar (MORN). That poor showing has spurred investors to switch to lower-cost passive funds and exchange-traded funds, which track indexes rather than try to beat them. Morningstar figures show that in the 12 months ending Mar. 31, passive U.S. stock funds had inflows of $24.4 billion and stock ETFs drew $42.3 billion, while active U.S. stock funds had outflows of $27.6 billion.

Contrafund, managed by Will Danoff, is Fidelity's largest (excluding money-market funds). It invests in growth companies—those expected to increase earnings faster than competitors. It was boosted this year by gains in its biggest holding, Apple (AAPL), which climbed 21 percent after the iPad's launch, and in Berkshire Hathaway (BRK.A), its third-biggest holding, which rose 5.8 percent. Google (GOOG), the fund's No. 2 holding, has declined 20 percent. Contrafund has risen at an average annual pace of 4.3 percent over the past five years, beating 93 percent of similar funds, Bloomberg data show.

Apple is also the top holding at Fidelity Growth, run by Steven Wymer. The fund's second-biggest stake is in salesforce.com (CRM), the world's largest seller of Internet-based customer-management software; shares have advanced 22 percent this year. Over the past five years, the fund has climbed at an average annual rate of 5.1 percent.

Vanguard Windsor II, managed by six independent subadvisers, targets companies seen as undervalued when measured against earnings and other metrics. The fund has been hurt this year by its position in BP (BP), which has dropped 34 percent since the Apr. 20 rig explosion. The fund had 1.5 percent of its assets in BP as of Mar. 31. "It's been a very volatile period of time, and you can be on the right side or the wrong side of that," says Dan Newhall, of Vanguard's portfolio review team. "And with volatility you can make some of your more compelling investments."

The bottom line: With active managers failing to beat the market consistently, more investors are favoring index funds, which aim only to match the market.

Condon is a reporter for Bloomberg News in Boston.
Bhaktavatsalam is a reporter for Bloomberg News.

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