I had lunch with my friend yesterday.  He owns a consulting business in Crown Pointe {{Matthews}}, NC.  Since he started his business, he has had his money invested in mutual funds.  He has been busy managing his business and felt he could trust the experts in the best mutual funds to manage his investments.

As a result of this recent business downturn, his business has been losing sales, and losing money.  He considered taking some of his money invested in the mutual funds to loan to his business until the recession was over.

To his surprise and disappointment, his mutual funds had lost tremendously over the past 10 years.   He didn’t notice it because he has been so preoccupied with his business. He thought he had made a prudent decision to leave the investing to the mutual fund experts.

Recently, he came across Tom Taylor’s article in the Baltimore Examiner, “The best performing diversified mutual funds so far in 2009”. Although the article was cautionary he felt he might find a gem among the listed funds.

    Let’s take the case of the Elite Growth & Income fund, ticker “ELGIX.”  The fund is third on the list and is up an impressive 35.94%.  Very good performance relative to the S&P 500’s roughly 2% increase so far this year (through Friday. 6/26/09).

    However that’s not nearly the whole story.

    Chances are, not many investors purchased shares in the Elite fund on 12/31/08 to only realize that significant gain.  Chances are,  investors have held the fund for some time in a 401k, IRA or taxable savings account and therefore suffered the -50.32% loss last year.  Some will tell you that up 36% this year and down 50% last year means you only lost 14%…not true and here’s how you do that math.

    Let’s assume on 1/1/08 your account value in the Elite fund was $10,000 and you lost 50.32% of your money in 2008 (the actual performance of the fund according to Morningstar).  Your account value on 12/31/08 would have been $4,968.  Now you continued to hold onto the fund and are happy with the 36% positive return so far this year.  Your account value after the rise is now $6,753…still down -32.47% since 1/1/08.

My friend decided to do some research on the list by going to  http://finance.yahoo.com and checking their 5 year ‘Load Adjusted Returns’.  These are the average annual rates of return adjusted to include the fund’s financial charges.  He showed me his findings for these top funds.



YTD 2009 RETURN % *
[as of 6/29/2009]

5 year Load Adjusted Returns ** [except as noted]

Direxion NASDAQ-100 Bull 2.5X
39.663 yr = -22.96%
Ancora Special Opportunity
Elite Growth & Income
Rydex Dynamic NASDAQ-100 2X St
ProFunds UltraNASDAQ-100
William Blair Small Cap Growth
Van Kampen Equity Growth
Touchstone Large Cap Value
N/A31.22Not reported
Royce Select II
AIM Mid Cap Basic Value
* Morningstar
** Yahoo

We commiserated while drinking several cups of coffee at Chili’s.  He knows he should have been more attentive to what was happening with his money, but he felt that he had made the right decision years ago.

A number of issues bothered him that he pointed out in the table.  First, it was apparent there was no correlation between the Morningstar ranking and actual performance.  The top performer had only 1 star.   Next, he was shocked that the 5 star fund had such a poor 5 year performance.  He observed, in most cases, he would have done better leaving his money in a bank or money market account.  I explained the Morningstar ranking only compares how the funds are doing relative to one another. A high ranking does not imply a high probability of success.

My friend had assumed that by choosing the top mutual funds and trusting that over time, they would perform well.  That strategy just didn’t work, this time.  He concluded, “Mutual funds have failed him once, he is not going to allow that to happen again.”  We agreed to meet again soon to discuss what options are available.

After we meet, I will relate to you what he determines is the best course to take.