Mutual fund 'batting average' useful tool to look at when investing

By John Waggoner
USA Today

In October, even people who have been cryogenically frozen seem to know batting averages, earned run averages and slugging percentages. But do you know your mutual fund's batting average? You should.

Although funds have had some winning years — such as this one — the Standard & Poor's 500 stock index usually clobbers them in the long run. The S&P 500, which measures the performance of large-company stocks, is up 16.2 percent the past five years, versus 15.1 percent for the average large-company stock fund, Lipper says.

Fund managers who try to beat the S&P 500 are playing with a disadvantage: They take money from the fund's assets every year to pay expenses. If a fund takes, say, 1.3 percent of its assets every year to pay rent, salaries and legal fees, it must then beat the S&P 500 by 1.3 percentage points each year just to match the S&P 500.

Finding a fund that beats the S&P 500 has become the investment equivalent of scouting out a hitter with a .400 batting average. Many investors have given up, choosing instead to buy a low-cost index fund that tracks the S&P 500. It's a good strategy.

Even if you find a fund that has beaten the S&P 500, you may not want to invest in it. Consider Fidelity Growth Company, which has gained 38 percent the past five years. It hasn't been a comfortable ride. The fund gained 79 percent in 1999, then tumbled 6 percent in 2000, 25 percent in 2001 and 33 percent in 2002. To its credit, the fund has had a strong 2003, gaining 37.6 percent. But most people don't have the stomach for that much volatility.

It's better to find a fund that can beat the S&P 500 by a small margin on a regular basis. Over time, those gains add up — minus some of the heart-stopping ups and downs of more aggressive funds.

How do you find consistent funds? Lipper, the fund tracker, generates a consistency statistic figure best described as a batting average. The batting average looks at a fund's 12-month record vs. the S&P 500 for five years. The first period, for example, would begin Sept. 30, 1993, and end Sept. 30, 1994. The next would start Oct. 31, 1993, and so on. In a 10-year period, the fund would have 109 matchups against the S&P 500.

The batting average would lead you to Fidelity Dividend Growth, which batted .715 against the S&P 500, rather than Fidelity Growth Company, which hit .376. Despite some terrific years, Growth Company gained 185 percent the past 10 years, vs. 260 percent for Dividend Growth. To continue the baseball analogy, Growth Company is a streak hitter, while Dividend Growth keeps producing singles and doubles.

The fund with the best batting average: Torray, named after Robert Torray, its longtime manager. The fund is batting .761 against the S&P 500, and has gained 267 percent the past decade.

What do funds with high batting averages have in common? Most, but not all, have:

• Light trading.

The best measure of a fund's trading activity is called turnover.

A fund that has 100 percent turnover will buy and sell its entire portfolio in a year, and most funds do. But Torray has just 23 percent turnover, while Dreyfus Appreciation has 2 percent turnover. Fidelity Dividend Growth is top trader, with 81 percent turnover.

• Modest expenses.

The five funds take about 1.1 percent of their assets for expenses each year, vs. 1.5 percent for the average stock fund.

• Long-term managers.

Charles Mangum, manager of Fidelity Dividend Growth, is the baby of the group: He's been with the fund a bit more than six years. But the average tenure of the five hardest hitters is 13 years. William Oates, manager of Northeast Investors Growth, has run the fund for 23 years.

• An aversion to risk.

All five funds tend to rise and fall less than the S&P 500. For example, Torray's worst 12-month return was a 21.5 percent loss for the period ended March this year. The S&P 500 fell 24.7 percent.

Most also keep an eye toward prices relative to earnings. Stocks in Torray's portfolio, for example, have an average price-to-earnings ratio of 17.1. That's lower than the S&P 500. Even AmSouth Growth, the most aggressive of the five, keeps a close eye on stock prices. That's not typical for many growth funds.

Consistency doesn't guarantee first-rate returns. And a good batting average now doesn't guarantee one later, as any major leaguer knows. But funds with a high batting average may spare you a few heart-stopping moments. There's enough of those in baseball.