Over the next few weeks, as the March 1 RRSP deadline approaches and the mutual fund industry feverishly pumps its vast array of products, investors will be buying into the hype and scouring the papers for the hottest funds.
It’s the annual ritual. And, like gamblers hopping blackjack tables, many will dump their losers and jump into bed with last year’s winners.
Who wins at this game?
Normand Lamarche wins.
Lamarche manages the fund that ranked as Canada’s hottest mutual fund of 2003. His $40 million Front Street Special Opportunities Fund was up 121.2 per cent last year.
Do investors win by jumping on the hottest bandwagon?
Not a chance. Buying what’s hot today is a surefire recipe for disaster tomorrow.
And numerous studies have shown that the penchant for chasing hot mutual funds is a dangerous game that simply doesn’t work.
One study by the U.S.-based Financial Research Corporation in recent years showed that chasing hot funds resulted in lower returns in 80 per cent of fund categories researched over one-, two- and three-year terms.
Studies of the hottest fund managers have also shown that many of them are relegated to the bottom half of the pack within one to four years.
This is not to say that Normand Lamarche, whose spectacular banner year was triggered by the run in mining and oil and gas stocks, will not continue to hold a hot hand in the next few years.
But everyone comes back to earth eventually. It’s human nature. You’ll know that if you picked Jarome Iginla in the first round of your hockey pool last year when he flamed out after a phenomenal season.
In the mutual fund game, there are too many fund managers, too many products and nobody repeats. If Lamarche repeats in 2004 with Canada’s top performing fund, I’ll eat another column with perogies and sour cream.
This time, it’s a safe bet – although I’m still picking newsprint from my teeth from the last time I dined on my words of wisdom in questioning Ross Healy’s sanity.
In 2001, Healy said Nortel Networks stock would drop to $18 from $30 and it turned out the president of Strategic Analysis was way too optimistic as the shares dropped as low as 67 cents in 2002.
Lamarche’s Front Street Special Opportunities Fund continues to be weighted in small resource companies such as Savannah Energy Sources, its top holding, Midnight Oil and Gas, and Wolfden Resources, so a major correction in energy and mining stocks in particular could be devastating to that fund.
No doubt, investors will also be falling head over heels in love with the Acuity Pooled Canadian Small Cap Fund and the Dynamic Power Hedge Fund. Those were Canada’s two other funds boasting returns of 100 per cent or more in 2003.
Investors who play the fund form charts are committing one of the cardinal sins of investing. They are looking back into their rear-view mirrors when they should be looking ahead.
If you love those form charts so much, buy a racing form and go to the racetrack.
Have you ever seen a race horse impersonate a mutual fund investor by looking over its shoulder?
No, I didn’t think so.
The horses tend to run a little straighter than some mutual funds.
See, there is something to be said for wearing blinders.
* STREET TALK: Legendary investor John Bogle, founder of the Vanguard Group, recently called for the mutual fund industry to bring stewardship back to the fore in a Barron’s panel discussion on the industry’s sagging credibility.
“We have changed from a profession of stewardship into a business of salesmanship, and the conglomeration is part of that,” said Bogle.
“We are going to have to get away from that. We are going to have to simplify, and then if we only do all these things, all is well and all will be well.”
* SAGE WORDS: “I expect that a prolonged faltering market will produce a sudden rush of redemptions. Fund managers will have to dump stockholdings in order to pay off departing investors.”
– Andrew Sarlos, author of Fear, Greed and the End of The Rainbow (which preceded the bear market by three years).
The one-time ‘Buddha of Bay Street’ was right. Despite the market’s resurgence in 2003, the Canadian mutual fund industry wound up with a whopping $607 million in net redemptions for the year.
HOT STOCK: HOLLINGER INC.
HLG.C-TSX $7.40
Up $3.50 (+90.0%) on 1,284,500 shares (for week ending Jan. 23).
A funny thing happened while the lawyers were getting rich off the Conrad Black soap opera that may hog the spotlight for years. The shareholders of Black’s Hollinger holding company, the major stakeholder in scandal-riddled Hollinger International, are also
getting rich as shares in the Toronto-based company spiked on a proposed takeover pitch from Press Holdings International. Stay tuned.
HOT STOCK: ART ADVANCED RESEARCH TECH.
ARA-TSX $2.85
Down 70 cents (-19.7%) on 393,400 shares (for week ending Jan. 23).
Many tech companies have been going up for no reason, so there’s no reason to believe they shouldn't go down for no reason. There was no news on red-hot
but volatile tech play MedNet, but the stock spent a week in the cooler. The Montreal-based company develops optimal imaging technologies for the biomedical field.
