From a reader by the e-name of AASLCS (whatever that stands for): “Okay, in an up market the evidence is clear about just riding an index fund. But what about those funds Forbes rates as an ‘A’ in down markets? I think American Funds’ New Perspective is one of them. Do you think they can do better than the index when the market falls?”
Yes. The problem is in knowing when the market is going to fall.
Index funds will always do just about the same as — a little worse than, because of expenses — the underlying index they’re meant to mimic. So in an up market, aggressive funds will often outperform them (but not always, by any means, given the much higher expense ratios of the aggressive funds), and in a down market, conservative funds will often fall less far (but not always, because although they are more conservative, they are also more heavily weighed down by expenses and fees).
As for New Perspective (800-421-4120), it has a good Morningstar rating, but to my mind a huge handicap in that it sports a 5.75% load.
One reason it does relatively well in down markets is that it’s a global fund — much of its money is in European stocks, which only sometimes act the same way as US stocks. And as compared with other global funds, its weightings in riskier Latin American and Asian countries tend to be quite light — so you’d expect the ups to be less up and the downs to be less down. Another reason: it’s a large fund that tends to invest in large US and foreign companies — which rise less in up markets and fall less in down markets.
One plus in being large is a relatively low expense ratio. Expenses are spread over a lot of money ($10 billion or so). But that 5.75% load is tough to justify. Yes, $10,000 invested in New Perspectives 15 years ago would have grown to more than $80,000 — but that’s still a shade less than had it been invested in the Standard & Poor’s 500 all that time, or about the same as an index fund with no load.
Why would you pay $575 to invest $10,000 and get the same likely return as you could investing it “for free?”
If you feel pretty certain the market is headed down, New Perspective may well head down less. (It has a beta of +.9, meaning that it’s likely to rise or fall only about nine-tenths as much as the market rises or falls.) But unless you sell at roughly the bottom, you’ll also do less well on the way back up. And if you do sell at roughly the bottom, switching to some other, more aggressive fund, you may not have held New Perspective long enough to trivialize that 5.75% load. (Sell a week after you buy, and it’s a killer; sell 40 years from now, and it will make an only trivial difference.)
How’s that for more than you ever wanted to know about the New Perspective fund?