After posting the worst month for stocks in years, we can glean some valuable information about investing in corrections by looking at the best and worst funds during the market meltdown.
But first, let’s take a look at some of the wreckage from August 2015:
- The Dow Jones Industrial Average, which tracks 30 stocks, suffered its worst month in more than five years with 6.4% decline. It was the worst August for the Dow in 17 years.
- The S&P 500 Index, a broader measure of U.S. equity performance, fell 6.3%, which marks its worst month in over three years and its worst August performance since 2001.
To add insult to injury, September started on a sour note, with a steep decline of 2.9% on the S&P 500. Factor in that one-day drop, and you get one of the worst one-month periods for stocks in a generation.
Therefore, as we look at the winners and losers of the correction, I’ll share the one-month returns through Sept. 1. Also, we’ll be ignoring leveraged funds, and instead highlight regular mutual funds — the ones you and I would be more likely to use.
So here are the best funds and the worst funds during the recent market meltdown.
Best Funds During the Market Meltdown: Fidelity Short-Term Bond Fund (FSHBX)
Bond funds, especially those investing in short-term bonds, were top performers in the past month, and Fidelity Short-Term Bond (FSHBX) was among the best in that group.
With all the fretting over falling bond prices ahead of the presumed interest rate hike in September, not many pundits or market analysts would have guessed that bonds would do better than stocks for the month ending Sept. 1.
With lower interest rate risk, short-term bond funds don’t get hit as hard as intermediate- and long-term bonds in the face of rising rates. The short-term bond holdings in FSHBX hit the sweet spot for bond fund investors during the market meltdown.
The Barclays Aggregate Bond Index fell a mild 0.05% in the 30-day period ended Sept. 1, but FSHBX gained 0.03%, which ranks ahead of short-term bond fears.
Might this be a clue about where to diversify in fixed income if the correction continues?
Worst Funds During the Market Meltdown: Fidelity China Region Fund (FHKCX)
Minimum Investment: $2,500
1-Month Performance Through Sept. 1: -18.21%
To no one’s surprise, the worst market segment during the market meltdown was Chinese stocks, and Fidelity China Region (FHKCX) was near the bottom of the heap.
FHKCX is a Morningstar five-star rated fund, and its long-term track record is solidly better than most China Region funds. However, its performance over the past month ranked behind 94% of its category peers.
There were other similar surprises across the board, such as Dodge & Cox International Stock (DODFX), which is a diversified foreign large-cap fund. Its steep decline of 11.27% demonstrates how an otherwise well-managed foreign stock fund can get hit hard on short-term returns with exposure to extremely weak market segments, in this case emerging markets.
Best Funds During the Market Meltdown: Tweedy, Browne Global Value Fund (TBGVX)
Minimum Investment: $2,500
1-Month Performance Through Sept. 1: -5.84%
In a month where foreign and emerging stocks got hit much harder than U.S. stocks, Tweedy, Brown Global Value (TBGVX) was able to pull out far ahead of the S&P 500 in the market meltdown.
Lead fund managers William Browne and John Spears have been at the helm of this five-star fund for 22 years, and their skills at picking stocks around the globe proved to be valuable in the correction.
The -5.84% one-month return through Sept. 1 beats 99% of foreign large-value funds and comes out far ahead of the S&P 500’s -8.8% return and -9.8% for that of the MSCI ACWI.
The long-term returns are also impressive, as evidenced by the three-, five- and 10-year performance ranks that are ahead of foreign large-value funds. The 15-year return ranks ahead of 95% of category peers.
As of June 30, 2015, the cash allocation was a hefty 22.5%, which illustrates this management team’s willingness to wait for major dips to find values while at the same time insulating the portfolio from big declines.
Worst Funds During the Market Meltdown: Longleaf Partners Fund (LLPFX)
Minimum Investment: $10,000
1-Month Performance Through Sept. 1: -12.57%
Some mutual funds perform extremely well in up markets, but equally poor in down markets.
Longleaf Partners (LLPFX) is an example of such a fund.
Its -12.6% return in the month ending Sept. 1 puts LLPFX in the 100th percentile rank for large-blend funds. You can’t get any worse than that. But in past rebounds, Longleaf Partners has done quite well; in 2009, its 53.6% return beat 98% of category peers.
What explains the volatility and the poor showing in the past month? Like many of the biggest losers in 2015, LLPFX has a sizable portion of assets (12.35%) allocated to Asian stocks.
Best Funds During the Market Meltdown: Bruce Fund (BRUFX)
Minimum Investment: $1,000
1-Month Performance Through Sept. 1: -3.97%
Mid-cap stocks and well-balanced funds generally fared better than the Dow and the S&P 500 in the market correction.
The Bruce Fund (BRUFX) is a solid case in point.
I’ve highlighted BRUFX a few times here in the past several months — once as one of the best actively managed funds with low expenses and another time as a low-risk mutual fund with high returns. Bruce illustrated both of these qualities in the market meltdown.
While you might not get excited about a decline of roughly 4% in one month’s time, that’s more twice as good as the -8.8% return for the S&P 500 for the month ending Sept. 1.
However, the fund’s allocation through the years has proven to be smart, as evidenced by its 10-year annualized return of 7.8% and the 15-year return of 15.3%, both of which smash the S&P 500.
Worst Funds During the Market Meltdown: Loomis Sayles Bond Fund (LSBRX)
Minimum Investment: $2,500
1-Month Performance Through Sept. 1: -1.92%
In a “risk-off” market, the bond funds that tend to get hit hardest are the go-anywhere kind like Loomis Sayles Bond Fund (LSBRX).
Although the LSBRX management team is led by legendary fixed income investor Dan Fuss, investors should expect bond funds with exposure to high-yield, credit-sensitive bonds to see stock-like declines when the market is in correction mode.
The -1.92% return for the month through Sept. 1 ranks below 90% of multi-sector bond funds and is a big step (for bond funds) below the major benchmark, Barclays Aggregate Bond Index, which was down a mere 0.05% for the same period.
However, long-term holders of LSBRX need not concern themselves too much with this short-term performance, especially if past performance is any indication of future returns (and if Dan Fuss remains on the management team, which he should).
Even after this and other significant declines over the past decade, Mr. Fuss and LSBRX still boast a 6.1% annualized 10-year return, which is far ahead of the benchmark and better than nearly 90% of multi-sector bond category peers.
This last point summarizes how long-term investors are wise to maintain their long views of the market and remember that periodic corrections are a normal part of the big picture.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds DODFX and LSBRX for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.