Top Mutual Fund That Isn't

Last Updated Jun 27, 2010 8:31 PM EDT

The Wasatch Micro Cap Fund (WMICX) was recently hailed as a top performer. Was it truth or fiction? How can it help your investing results?

My friend and financial journalist, Dan Solin, recently shared an email from a well known financial columnist. Because it wasn't in his column, I'm going to leave out his name to protect the guilty. In a rather rude email, this columnist was attacking indexing and touting this fund as a top performer. He supported his opinion by stating he had a relative who owned it for years.

Obviously, any columnist can use hindsight to pick some funds that beat an index. It doesn't work going forward. But that's not what this blog is about. This blog is about confusing a dog with a star.

A look at the Wasatch Micro Cap Fund
Morningstar shows the WMICX fund as a four star fund. And when looking at the Morningstar chart, it does appear to have trounced the indexes. So how, you may ask, can I say it's been a dog?

Here's how, if you look carefully at the Morningstar ten year chart, you will see that the great performance came between 2000 and 2003. What's happened over the last five years? According to Wasatch's own website, their fund earned 0.34 percent annually through May 31, 2010, which badly lagged the Russell 2000 small cap index of 2.77 percent annually.

If that's not enough, the performance over the past year lagged by even more. Thus, this fund has far more risk than a small cap index because the companies are much smaller, less financially stable, and significantly less liquid.

In reality, this columnist was touting a mutual fund which took more risk and achieved a lower return. With an expense ratio of 2.24 percent annually and 46% turnover, its odds of repeating a lucky streak it hasn't seen in years is pretty low.

Is this columnist up to something?
I've met the columnist touting this fund and I can tell you that he is a good guy. There are many forces at work that caused him to believe WMICX was a great fund. Here are three:

  • He couldn't overcome inertia, meaning that because it had been a top performer for a period, it would continue to be. Five years later, he still holds on to this belief.
  • Much like Cramer, his work only gives the audience what they want to hear - ways to make a lot of money in a short time.
  • Finally, he doesn't know he doesn't know the future or how bad the odds are of his advice actually working.
What this means to you
Over the years, the only way I figure I could have gotten rich by listening to the media is if I had a dime for every time they blatantly ignored the facts. Be very skeptical of anything you read or someone tells you. Always think of motives that may be involved, especially if it's coming from Wall Street. Finally, use common sense - If they actually knew how to make a lot of money in a short period of time, do you really think they would be writing about it?

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.