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This year has not been kind to mutual fund managers – at least the ones who try to predict the future. First, Bill Gross of Pimco warned everyone that they should cash out of Treasuries or “get cooked like frogs in an increasingly hot pot of water.” Gross manages the largest bond mutual fund and sold completely out of Treasuries earlier in 2011, only to have the performance of his Pimco Total Return Fund fall to the bottom 20% of bond funds for the past year. As Treasury yields continued to fall, prices went up and his investors suffered. In the past two months he’s increased his Treasury holdings to 16%, higher than it’s been since late last year. Looks like he’s the one feeling the heat!

This spring, Bruce Berkowitz, manager of the Fairholme Fund, dropped from leading 99% of his peers in performance for the last decade, to trailing 99% of the large company value fund managers in the last twelve months. In the past, holding only a handful of stocks and bonds in the fund paid off, but big bets in American International Group, Bank of America, Morgan Stanley, Goldman Sachs and Citigroup have backfired. The best performer in that group (Citigroup) is down 29.67% over the past twelve months vs. the S&P 500’s return of 5.64%.

On September 14th, one of the most well-known funds around, Fidelity Magellan, fired its manager, Harry Lange, after six years of subpar performance. He may have been a little premature when he told the Wall Street Journal in April of this year that “six months from now, I’ll look like I’m a star.” It’s hard to believe that a fund that once touted $110 billion in assets is down to $17 billion due to redemptions coupled with dismal returns. Hopefully the new fund manager, Jeffrey Feingold, who currently runs the Fidelity Trend Fund, can repeat his one year performance of that fund and will beat Magellan’s benchmark by 1.8%. I just wouldn’t want to bet any money I will actually need.

These are a few of the many stories of once heroic mutual fund managers falling from grace. We choose to invest our clients in the Dimensional Fund Advisors (DFA) funds because they are not depending on a “superstar” fund manager to continually outperform his/her peers. Their funds are not based on speculation, which often proves to be not only futile, but costly as well. DFA’s fund managers remain invested, capturing the returns of the markets, while keeping costs to a minimum. And because cost is the biggest predictor of the future performance of a fund, more often than not, they end up outperforming their peers.

Christine L. Carleton, CFP®