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Monday, November 12, 2007|
Index-fund Advocate Knocks Actively Managed Funds in His Annual 'Lemon List'
Index-fund advocate Doug Fabian, president of Fabian Wealth Strategies, has released his annual "Lemon List" of the worst-performing mutual funds. Fabian compiles his list by comparing a specific fund's performance with that of its peer group. For a fund to make it onto the Lemon List, it must under perform its category average for the past one year, three years and five years. So who tops this year's list of the worst performing funds? In order from the top are Templeton Growth, Vanguard European Stock Index, Fidelity Growth & Income, T. Rowe Price Equity Income, Fidelity Blue Chip Growth, Fidelity Dividend Growth, American Funds New World, Putnam Growth & Income, Legg Mason Value and the Vanguard Pacific Stock Index.
Doug Fabian, President of Fabian Wealth Strategies and editor of the "Successful Investing" newsletter, has just released his latest version of the infamous Lemon List, a scorecard exposing the worst-performing mutual funds. The Fabian Lemon List, represents approximately $1 trillion in assets during Q3, 2007 and identifies nearly one third of all mutual funds as lemons.
Mutual funds on the Lemon List are not just from obscure fund families. Rather, they include funds from names like Fidelity, Putnam and Vanguard. For a fund to make it onto the Lemon List, it must under perform its category average for the past one year, three years and five years.
By comparing funds to their category average, Fabian is able to compare a specific fund's performance with that of its peer group. This apples-to-apples (or in this case, lemons-to-lemons) comparison makes the Lemon List a unique tool investors can use to see if their mutual funds measure up.
"With the new Fabian Lemon List website, investors can instantly see if their fund's performance is sour when compared to other funds with similar investment objectives," said Doug Fabian, who added, "If you find you've got sour lemons in your portfolio, you need to take steps to sweeten up your returns."
One way Fabian thinks investors can help turn their lemons into lemonade is to make the switch from mutual funds to low-cost, objectively managed exchange-traded funds, or ETFs.
As an example of how ETFs can best lemon funds, Fabian cites the Putnam Discovery Growth (PVYBX), a mid-cap growth fund on the current Lemon List.
The fund has shown returns of 18.17% over one year, 13.06% over three years and 13.65% over five years on average. "Not bad, until you consider that the all three of these measures fell below the average for all mid-cap growth funds," said Fabian.
"You would be much better served by transferring your money to the iShares S&P MidCap 400 Growth (IJK), an ETF with a one-year performance of 20.91%, a three-year performance of 15.34% and a five-year performance of 14.24%," said Fabian, who went on to explain that, "A $100,000 in Putnam mid-cap growth fund over a five-year period would have grown into $171,026. But a similar investment in the iShares S&P MidCap 400 Growth would have grown to $201,469. That's $30,000 more over a five-year period, and that doesn't even factor in Putnam's 5% load, which you don't pay with ETFs."
Doug Fabian began publishing his Lemon List in 1998, but since its original publication the Lemon List has gone through a series of modifications to help it better reflect the current trends in the market. The latest Lemon List has been compiled by screening and comparing a universe of nearly 8,500 mutual funds.
The latest Lemon List also includes the 10 largest lemon funds, along with their performance data over the past one year, three years and five years. Each fund's category average performance is also listed, so investors can see just how poorly these 10 largest funds measure up to the average fund with the same objective.
The 10 largest lemon funds include a surprising list of familiar names whose assets total over $172 billion. They are:
Templeton Growth (TEPLX)
Vanguard European Stock Index (VEURX)
Fidelity Growth & Income (FGRIX)
T. Rowe Price Equity Income (PRFDX)
Fidelity Blue Chip Growth (FBGRX)
Fidelity Dividend Growth (FDGFX)
American Funds New World (NEWFX)
Putnam Growth & Income (PGRWX)
Legg Mason Value (LMVTX)
Vanguard Pacific Stock Index (VPACX)
The Lemon List also includes a complete list of mutual fund categories, along with their corresponding ETF alternatives.
Once a mutual fund advocate, Doug Fabian is now recommending exchange-traded funds to subscribers of his advisory services; for his managed accounts, and for his own personal accounts.
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