The Danger of Banking on a Top-Performing Mutual Fund
Every quarter, mutual fund performance is tallied and ranked, covering the short term, full year, and recent future, including 5, 10, and 20-year periods.* These rankings can be beneficial, but they often lead investors astray. Specifically, almost any top-performing fund will exceed expectations during a fixed period of time, but will under perform at other junctures.
Here are noteworthy takeaways for the large company stock-fund category, which takes into account expenses (but not sales charges), redemption fees, and sales loads.
- The top performing fund through November 30, 2019, the Meridian Enhanced Equity Legacy (NASDAQ: MEIFX) fund, was absent from the list prior to this year.
- The 10-year return for MEIFX (14.26%) was two percentage points lower than the 10th-ranked fund.
- Only one fund from the “1 year” list, Fidelity Advisor Growth Opportunities A (NASDAQ: FAGAX), was among the top 10 performers over a three-year period.
- Based on these figures, 90% of the top funds for a 12-month period failed to perform at this level for a three-year period.
- Zero percent of the funds that were among the top 10 performers for one year were among the top 10 performers for 20 years.
Certain funds have spectacular track records, like the aforementioned Fidelity Advisor Growth Opportunity A fund, which is well represented in several 1 through 10 year time periods. However, trying to cherry pick a top performer to bank on can be tricky. It’s best not to reject consistent performers with few, if any sales, changes, many of which operate with a high level of tax efficiency, so the gains you enjoy are not heavily taxed.
David R. Evanson is a financial journalist in Philadelphia.
* Anonymous, (2019). Top-Performing Mutual Funds by Category. Kiplinger. Retrieved December, 2019