2 Mutual Funds That Use Technical Analysis … to Disastrous Results

by Daniel Putnam | August 10, 2012 8:25 am

2 Mutual Funds That Use Technical Analysis … to Disastrous Results

Technical analysis has no shortage of enthusiasts — and why not? It’s a lot easier for the average investor to read a stock chart than it is to dig into a balance sheet. The trouble is, there really is no objective way to measure performance to see how well TA actually works. The academic studies[1] on the issue are virtually unreadable, and there is no efficient way to track the performance results of individual commentators.

There is, however, a fund that employs technical analysis as the foundation of its investment strategies: John Hancock Technical Opportunities Fund (MUTF:JTCAX[2]). The results speak for themselves:

Fund Ticker 1-YEAR 3-YEAR (Avg. Annual)
John Hancock
Tech. Opportunities
JTCAX 6.48% 2.11%
SPDR S&P 500 ETF SPY 27.81% 13.62%

John Hancock isn’t the only company to make an effort on this front. Huntington Funds, the fund branch of Ohio-based Huntington Bancshares (NASDAQ:HBAN[3]) that manages $13.5 billion in assets, also attempted to manage a fund using technical analysis — the Huntington Technical Opportunities Fund (MUTF:HTOAX[4]). The results here were equally dismal, and the company shuttered the fund on Aug. 3.

Fund Ticker 1-YEAR (as of 8/3) 3-YEAR (Avg. Annual through 8/3)
Huntington
Tech. Opportunities
HTOAX -18.44% -3.94%

This begs the question: If these are the results posted by the fund industry — with all of its resources and two portfolios managed by Chartered Financial Analysts — what hope is there for the rest of us? While technical analysis can provide its share of short-term winners, the dramatic underperformance of these two funds should give pause to even the most committed advocates of technical analysis.

Although their results were similar, the two funds approach technical analysis in a different manner.

The Hancock fund uses it to select individual stocks and to move in and out of the market in an effort to protect against downturns. The company doesn’t provide much information regarding the specific factors it evaluates, but the fund’s top 10 holdings[5] — which includes stocks such as Apple (NASDAQ:AAPL[6]), Expedia (NASDAQ:EXPE[7]), Biogen Idec (NASDAQ:BIIB[8]) and eBay (NASDAQ:EBAY[9]) — are a fairly clear indicator that price momentum is one of the most important considerations.

It’s difficult to tell exactly why John Hancock Technical Opportunities Fund has underperformed because the company meets only the bare minimum of SEC reporting requirements, but a section of the fund’s annual report may provide a clue:

“… Other large detractors included U.S.-based coal producer Alpha Natural Resources, Inc. and air carrier U.S. Airways Group, Inc. We held both securities because they exhibited positive trend characteristics. Our process led us to exit both positions before the end of the period as their price structure eroded and broke support levels.”

Buying momentum stocks and holding them until they break support has been a dangerous game in recent years, as evidenced by the many blow-ups of the past earnings season[10].

The Huntington fund employed a somewhat different strategy, using technical analysis to move among various asset classes using exchange-traded funds. However, the sudden shifts in stock market performance over the past two to three years would have whipsawed any investor who was caught wrong-footed amid a major move in either direction. Clearly, Huntington was among those that fell victim to the volatility.

While two funds admittedly make for a small sample, their performance serves to confirm the claims by TA critics that reading the charts is a coin flip at best.

So what are we, as individual investors, to glean from this?

Nothing we didn’t already know: Technical analysis has more than its share of flaws, and it works best when paired with traditional fundamental analysis to form a more complete picture. While you shouldn’t ignore TA, you certainly shouldn’t live and die by it, either. And if there’s any doubt, the track record of these two funds serve as a stark reminder.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

Endnotes:
  1. academic studies: http://www.search-document.com/pdf/1/9/modern-technical-analysis.html
  2. JTCAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=JTCAX
  3. HBAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=HBAN
  4. HTOAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTOAX
  5. top 10 holdings: http://finance.yahoo.com/q/hl?s=JTCAX+Holdings
  6. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  7. EXPE: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXPE
  8. BIIB: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIIB
  9. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  10. many blow-ups of the past earnings season: http://investorplace.com/2012/07/the-q2-earnings-season-shooting-gallery/

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