Finding the Best – Through Data Mining

Barron’s released its annual Best Fund Families in the latest issue, a ranking of best mutual funds in conjunction with Lipper Analytical Services. Boston’s Putnam Investment Management took the top spot earning top 10 rankings in three of the five mutual fund categories (just missing a fourth by placing 11th in Taxable Bonds). Putnam which manages $45 billion in assets beat out the much larger PIMCO due to its dramatically better performance in the U.S. Equity segment. Putnam placed fourth whereas PIMCO placed 33rd. Austin’s Dimensional Fund Advisors ranked first in U.S. Equity lead by its Large Cap Value Fund, but was outside the top 20 in each other category.

The top five U.S. Equity Fund Families according to Barron’s were:

The worst ranked family of U.S. Equity Funds were:

Fear not for, pick one, Pioneer Investment Management because frankly we aren’t sure what these lists tell us. They are clearly not a predictor of future results. Take Putnam as an example. In 2011, Putnam ranked second to last, only to take the top spot this year.

Let’s rewind and look at Barron’s/Lipper 2011 “Best of” list and review the results with the benefit of 20/20 hindsight.

Worth the Risk, February 6, 2012, Barron’s Cover Story

The best mutual-fund families guided their investors’ portfolios through 2011’s many dangers without taking undue risk….Successful fund managers didn’t try to guess where the next problem would pop up; they mostly stayed invested in relatively safe securities, adding to positions they liked when they were cheap. Maybe they didn’t enjoy the rallies quite so much as bigger risk takers, but they didn’t get so badly hurt in the sharp declines. Their funds offered a balance of Treasury, mortgage and corporate bonds along with mostly defensive, high-quality stocks that paid dividends or enjoyed substantial market share. A strong year-end rally in riskier assets like small-caps and emerging-market stocks couldn’t overcome the benefits of adding to long-term positions that traded at discounts at various times during the year.

The top two fund families as classified were Delaware Investment Advisors and Vanguard. It is somewhat ironic that Vanguard, an index powerhouse, tops the list. However, the more insightful irony is the next three names. You’ll recognize two of the three from above – Neuberger Berman Management, First Investors Management and State Farm Investment Management. Neuberger and State Farm were amongst Barron’s/Lipper’s 2012’s worst performers. The article notes, “These firms tended to do reasonably well in areas where the vast majority of mutual-fund managers performed miserably, such as large-cap growth stocks, which were down 1.91% last year, and small-cap value, which fell 5.20%, according to Lipper.”

2012 U.S. Equity winner DFA, ranked 42nd in 2011, after placing first in 2010. “[2010's] No. 1, Dimensional Fund Advisors, owns a mind-boggling 13,000 stocks, or about 70% of the world’s publicly listed equities. It’s a strictly quantitative fund outfit with substantial holdings in small caps and emerging markets, two volatile areas. As a result, it was fully invested in some of the best-performing sectors in the second half of 2010 when equities markets rallied strongly and unexpectedly.”

The 2011 article mocks the list (unintentionally, I presume) when it notes, “The perfect fund manager…would have stayed in Treasury bonds until Oct. 1 of 2011 and then jumped into high-yield bonds in the fourth quarter. On the equity side, he or she would have bought Apple (ticker: AAPL) or International Business Machines (IBM) in the last quarter. But no one’s footwork is quite that good.” However, that is exactly what this list is doing. It identifies which managers performed most ideally given the circumstances that the year presented. There is no case to be made that the managers forecasted these results or tailored their portfolios to meet the conditions.

To be clear, I don’t blame Barron’s for publishing the data. People like to read about winners and losers in specified time periods. However, no one should conclude anything from these lists other than who did well under these following circumstances that are unlikely to be completely replicated…ever.