In a decade with two bear markets and lackluster returns for many investors, American Funds created the most wealth for investors, while Janus destroyed the most wealth, according to a survey released by Morningstar.
For the survey, Morningstar looked at the 50 largest mutual fund families and their total net assets at the end of 1999. Then the fund tracker subtracted each fund company's total cash flows over the decade and deducted their total net assets at the end of 2009. Numbers were calculated in dollar terms so that any funds that were liquidated during the decade would also be included.
Since the time frame started at the height of the tech bubble, many funds that were heavily invested in growth and technology stocks didn't perform well over the decade. "Given that the decade in question had this huge bear market right off the bat, it really sealed the fate for some companies," says Russel Kinnel, Morningstar's director of mutual fund research.
Morningstar determined that Janus and Putnam were the two largest "wealth destroyers" during the decade, losing $58 billion and $46 billion, respectively. "Janus and Putnam rode the growth wave more than anyone else," Kinnel says. "They had some very aggressive funds that put up big numbers that got huge inflows." After the tech bubble burst, the funds that were most heavily invested in these types of holdings experienced huge sell-offs, which made it difficult for these funds to attract inflows through the remainder of the decade.
According to Morningstar, American Funds created about $191 million in wealth for investors during the decade, followed by Vanguard and Fidelity. Since American Funds generally employs a more value-oriented strategy, the firm was largely able to avert the first bear market of the decade. "The 2000 to 2002 bear market was all growth and tech, and American barely touched that, whereas they had lots of value, dividend payers, and bonds, which did very well," Kinnel says.
Recently, the tables have turned for American. In 2009, it lost the most of any fund family (more than $25 billion). No fund family, including American, was able to avoid the bear market of 2008. The same strategy that allowed American to bypass most of the first bear market failed because many well-known dividend-paying companies, like big financial firms, experienced huge losses.
The study offers a few important takeaways. Kinnel says investors should understand their risk tolerance and make a plan for "market extremes." The logic: a well-thought-out plan will make investors less likely to panic in the event of a major market sell-off. For example, 2009 was a great year to be invested in the broader stock market, but many investors missed the rally because the losses they experienced in 2008 scared them away from investing in stocks.
Kinnel also notes that those who read too much into the past one to three years of fund performance are setting themselves up for disaster. In terms of what investors should focus on in the next decade, Kinnel says: "A number of the top wealth creators have low-cost funds. That's a key way that investors can build wealth over the long-term, especially if you have a decade like the last 10 years where some asset classes did well but others had meager returns and low expenses were tremendously valuable."