The case for buy-and-hold investing is quietly being undermined by some of the numbers coming out of the mutual fund industry these days.
Think five years is a good, long time to hold a fund? Then you should know that 241 mutual funds of all types have lost money annually on average over the five years to July 31. Does a decade sound like a better bet? Okay, but 133 funds have been money losers over the past decade. Fifteen years? There are eight funds that have been money losers over that period of time, and there are three that are underwater over the past 20 years.
This widespread destruction of wealth isn't the fund industry's fault, per se. While the Canadian stock market has surged over the past five years, global markets have been sickeningly bad. Measured in Canadian dollars, the S&P 500 stock index has lost an average 1 per cent annually for the 10 years to July 31, and that's with dividends included.
The MSCI World Index, the standard gauge for measuring global equity funds, made all of 0.4 per cent annually in the past decade in Canadian dollars. The average money market fund, virtually risk free, made a tick under 3 per cent annually over that period.
The concept behind buy-and-hold investing is that by staying put for the long term in a fund, you benefit from the tendency for financial market ups to more than offset the down periods. Today, we can draw one of two conclusions from the long-term results of many funds.
One is that 10 years isn't long enough to qualify as long term any more. If you can invest in the U.S. stock market, the world's largest, and lose money over a decade, then maybe you need to hold for 15 or 20 years to generate a decent return.
The other conclusion, and the more practical one for investors, is that buying and holding a fund indefinitely should only be done with premium products that have shown long-term consistency. Everything else gets put on probation after you buy. If you're still in the red after, say, three years, then you get out.
We need to be clear about something here. Having a down year, or even two in a row, is in no way an unforgivable sin for a mutual fund.
A lot of mutual funds that follow the value school of investing - they own quality stocks that are beaten down - have been floundering for a couple of years now. Example: The Chou RRSP Fund, managed by Francis Chou, has lost about 4.7 per cent annually over the past three years, even while it remains above average over the past 10 years. That's life with value funds. They're in and out of favour, but they're a good long-term hold if they're well managed.
If the poor result from so many funds lately tells us anything, it's that investors and advisers have to be much more discriminating about where they invest. This applies to fund managers, fund companies and fund sectors.
Let rookie managers practise on someone else's money. Only if they deliver consistently good returns should you give them some money to run. New fund companies? Ignore them unless they've poached a top manager from somewhere else, or otherwise established some credentials. Tricky fund sectors? By all means put a bit of money in clean energy or Japan funds if you have a solid rationale, but set out a maximum loss you're willing to tolerate and sell if you get there.
This is how you avoid traps like the 15-year compound average annual loss of 5.3 per cent that the Investors Japanese Equity Fund has posted. If you started with $1,000 in this fund 15 years ago, you'd now have about $442.
If you already hold a long-time loser of a mutual fund, it's time to evaluate its chances for making a comeback. Keep in mind that just one great year can shore up a weak 10-year return for a fund. That's how changeable those 10-year numbers are.
The key question: Are you in a fund managed by someone who knows how to squeeze the juice out of the next rally or prosper in the lean times until we get there? Again, investors and advisers have to be very choosy about where they place their loyalty right now.
One of the great mysteries of the fund world is how so much money has been invested in terrible mutual funds. In strong markets, like the one we've seen in Canada over the past five years, investors can get away with this. In challenging markets, you want to have a strong degree of confidence that your manager can turn losses into profits over time.
Buy and hold still works with the good managers out there. With all the others, it's a concept that only benefits the fund industry.
Long-term losers
Here are some mutual funds that have lost money over long periods of time.
For the 20 years to July 31
| Fund | Assets ($million) | Average annual loss |
| AGF Japan Class | $43.1 | - 1.3% |
| Investors Japanese Equity | $301.2 | - 3.4% |
| Mavrix Growth | $5.3 | - 2.7% |
| For the 15 years to July 31 | ||
| AGF Japan Class | $43.1 | - 2.1% |
| AIM American Growth | $16.9 | - 1.7% |
| CI Pacific Corp. Class | $18.0 | - 0.4% |
| Fidelity Japan B | $38.0 | - 1.2% |
| GrowthWorks Canadian | $193.7 | - 1.5% |
| Investors Japanese Equity | $301.2 | - 5.3% |
| Investors U.S. Large-Cap Growth | $190.0 | - 1.6% |
| Mavrix Growth | $5.3 | - 5.1% |
DOUGLAS COULL/THE GLOBE AND MAIL
SOURCE: GLOBEFUND.COM
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