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I'm giving myself an A' for '03
Everybody had a good year, but I had a great one. My blunders were small, my successes big. Meanwhile, the Clean Funds nominations roll in.
By Timothy Middleton
This has been a banner year for most investors, and readers of this column could have beaten the market handily if they followed the good ideas I offered in the last 12 months -- and ignored the bad ones.
I beat the drum for active management, which more than paid its way, and for small-cap stocks, which delivered nearly twice the performance of big caps. My biggest blunder was underestimating the depth of the dollar's rout, which boosted foreign-stock funds.
However, fixed-income investors, I would suggest if I were not so modest, should build altars to me in their homes. I warned you away from government bonds, which did miserably, and directed you toward junk and emerging-markets debt, which did splendidly.
Last year I gave myself an A in my annual report card -- to considerable debate, I might add -- and this year (surprise!), Im doing that again. Last year, I claimed credit for beating the market with the majority of my recommendations. Considering the fact that the market tumbled 22.3%, losing less was cold comfort.
But this year Vanguard 500 Index (VFINX) is up 25.8%, as of Dec. 18, and you could have done much better. Here, for your consideration, is my report on how I did in 2003.
Staying active
Among my first columns of the year was one advocating active management over indexing. The allure of active management is hard to resist, I wrote, because economic recovery would favor certain industries and companies more than others, and indexers arent free to pick and choose.
In the event, Vanguard 500 Index finished November in the 56th percentile among domestic stocks funds, meaning more than half did better. Some did much better.
For example, in May, I recommended Calamos Growth (CVGRX), which, I wrote at the time, was selling defensive stocks and aggressively buying cyclical issues, including such downtrodden names as Cisco Systems (CSCO, news, msgs) and Qualcomm (QCOM, news, msgs). It worked. Through Dec. 18, the fund was up 38.3%, with 22 of those percentage points earned after my column appeared.
In July, I recommended Hancock Horizon Burkenroad Fund (HYBUX), which gets many of its investment ideas from students at Tulane University's A.B. Freeman School of Business. As of Dec. 18, it was up 31.4%.
Burkenroad invests in small companies, so it had the wind at its back -- and it was a mighty wind. I devoted a column in September 2002 to small caps, then reiterated my belief they would outperform in January and again in May. Since Oct. 1, 2002, the Russell 2000 Index ($RUT.X) is up 44.3%.
Among large-cap stocks, I took a look at financial-stock funds in June. They had done superbly in the bear market, but I predicted they would falter as the economy rebounded. They didnt, beating the market again this year by 4 percentage points, as of Dec. 18.
Happily, two months earlier I had written a bullish piece on technology funds. During the year, that sector spurted way more than finance, with the average tech fund finishing up more than 51%, as of Dec. 18.
Unhappily, investors who took my advice to avoid foreign-stock funds missed out on some juicy returns. Funds investing in Europe and Japan topped their domestic rivals, with total returns as of Dec. 18 of 33.9% and 30.7%, respectively. My excuse -- that all the market-beating performance came from a weaker U.S. dollar, and thus stronger yen and euro -- only proves that my currency savvy is suspect.
I didnt completely muff my foreign analysis. In April I said SARS fears were probably overblown and recommended a closed-end fund, Templeton Dragon (TDF), that invests mainly in Chinese stocks. Talk about timing: Between May 1 and Dec. 16, the price of the shares shot up 78.6%.
Income alternatives
While stocks rallied briskly in 2002, the same couldn't be said for bonds. They had enjoyed a 20-year bull market, but it was clearly ending as 2003 began. In a series of columns at the beginning of this year, I argued that Treasury bonds had become the riskiest in the marketplace, and government bond funds went on to have their worst year since 1999, which had been the worst since 1994.
I suggested three alternatives for income investors. In February, I touted funds that invest in real estate investment trusts, and through Dec. 18 they were up an average of 34.9%. In March, I recommended emerging-markets debt, and the average fund in that group shot up 29.7%.
In April, I called attention to junk bonds, predicting a stronger economy would invigorate their returns. It did, with the average fund up 23.4%. This was junks only decent year since 1997.
Turning to gold: In March 2002, I devoted a column to gold funds, at a time when the spot price was struggling to break through $300. I wrote at that time, I cant imagine owning a gold fund now -- unless the metals price can penetrate the $300 barrier and stay there, adding, If (that) does happen . . . growing excitement about gold could translate very quickly into a doubling or even tripling of todays share prices. I would make that play with 5% to 10% of my assets.
I took my own advice a few weeks later and have held on ever since. But then, in February of this year, I warned you to sell gold and natural-resources funds because they had run up so much ahead of the invasion of Iraq.
Fortunately, I wrote in that February piece that after "a few months" of negative performance, you should "give thanks and buy them in bulk."
If you did, you avoided down markets in gold and resources in February, March and April and benefited from rallies that began in May and took natural resources funds up a market-beating 30.8%, as of Dec. 18. My own gold fund, Tocqueville Gold (TGLDX), which had shot up 83.3% last year, rose a further 47.6% this year, as of Dec. 18.
Buy or sell gold now? Ill take up that question in next weeks column. Ill also sketch the investment environment I see shaping up. Todays market isnt as rich with opportunity as it was one year ago, but opportunities do exist.
A side note
"Clean fund" nominations: Scores of you have sent me e-mails proposing candidates for our clean funds list. More than 50 fund companies have been proposed.
The favorite funds of our readers: Dodge & Cox. Another leader among nominations was American Funds. Also proposed by a dozen or more correspondents were funds from Oakmark and Longleaf.
Ill be doing due diligence on nominees in the weeks and months to come. In the meantime, feel free to nominate fund companies you believe are ethical, as well as successful, investment managers. You can e-mail your suggestions to me at timothy@middleton.net.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Tocqueville Gold. He also controls shares of an S&P 500 index fund in a family members defined contribution pension plan.
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