Avoid Getting Sucked In at the Top

The sound of the bell ringing at the top can be hard to hear.

Most mutual funds are bought by individual investors. Much of those funds’ net inflows come at exactly the wrong time. They take place right after a period of outperformance and just ahead of a lapse back toward worse results.

Media attention tends to highlight what’s “been working lately” rather than what is likely to be good in the future.

This week’s Barron’s offers a great example of how unsophisticated people are often drawn into the wrong fund at the wrong time. Columnist Sarah Max featured Cullen High Dividend Equity (CHDEX) with the very positive spin shown in the teaser below.

Cullen’s managers had a very good performance over the last 12 months. As of mid-July, it returned 10.92% versus 4.87% for the S&P 500. The fund’s style benefited from the recent popularity of utilities, telecoms and other defensive-themed, higher yielding stocks.

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We all wish we’d been there, achieving more than twice the broad market’s total return. You can’t buy past performance, though. Before plunging in to CHDEX it might be good to see how it did over the longer term.

The link provided in Barron’s took me to Lipper’s ratings and data going all the way back to the fund’s Aug. 1, 2003 inception date. It shows Cullen High Dividend underperformed the S&P 500 over three, five, 10-year and “since inception” time frames.

Note that those periods, the longest dating back almost 13 years, include the past year's outstanding results. Should you judge and want to own this fund based on the one time out of 13 years it outperformed, or the 92.3% of the time it failed to match the S&P 500 index?

Lipper apparently maintains a very low standard of excellence. Despite the fund’s lagging of the S&P 500, inconsistent results and below average tax efficiency, Lipper assigned CHDEX their highest rating for total return.

Barron’s tried to paper over Cullen’s long-term return gap by benchmarking it to the pretty obscure Russell 1000 Value index rather than the traditionally used S&P 500. On that basis it matched the index for the trailing three years, but still dragged a bit during the trailing half-decade. Due to print deadlines their figures were through July 13.

Max went to great lengths to highlight the defensive nature of the fund. She said they usually did better than the market during turbulent periods. Based on their overall track record, that implies they did worse during good times. I’d call that a wash at best.

Cullen High Dividend’s top 10 holdings have become very popular.

Unfortunately, that popularity factor has pushed those stocks to valuations that are well above their own historically normal levels. Eight out of 10 of the top holdings have P/E multiples far exceeding their 10-year medians. Nine out of 10 have current yields far under their own average yields since 2006.

What do today’s investors in Cullen High Dividend Equity fund get for their money? They'd be buying into an overpriced portfolio of stocks that are more likely to mean-revert than to continue upward.

If history is a good guide, Barron’s probably highlighted this fund just as CHDEX is ready to resume its underperforming ways. Sometimes Wall Street does ring a bell at the top. It often comes in the form of glowing recommendations.

Disclosure: No position in Cullen High Dividend Equity fund.

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