130/30 Funds' Past Performance

Standard and Poor’s has announced that they will launch index coverage of the 130/30 Strategy. Note that this will be different from the actual universe of 130/30 funds’ performance. (See yesterday’s post on the 130/30 mutual fund structure for more information.) The key word is "Strategy". What the index will track is the S&P 500 as the core of the index plus a 1% overweight to 30 top stocks and a 1% underweight to 30 bottom picks. This is designed to provide a benchmark of sorts for the fund managers to try and beat.

Basically, since there is no real 130/30 index they have attempted to create an index that is derived from the S&P 500 in a manner that is similar for the investment mandate of a 130/30 strategy. Their picks of the top 30/bottom 30 stocks is based on Standard and Poor’s STARS stock ranking system.

Money magazine published a comparison between all 130/30 funds’ performance and the "plain Jane" S&P 500 for a short period (July 19th, 2007 – October 9th, 2007) and found that the market returned 1.7% but the 130/30 funds underperformed by 2.1% for a total return of -0.4%.

For the full year ending November 9th, 2007 the S&P 500 returned 7.5% and again the 130/30 funds underperformed – this time by 1.2% for a total return of 6.3%.

ING Funds has a 130/30 fund and you can look at a Google Finance Chart here. I compared the fund’s (short) performance against Vanguard Fund’s Total Stock Market Exchage Traded Fund – which tracks the S&P 500. There isn’t enough history to make meaningful conclusions – but so far the claims of adding Alpha are not being met (at least for ING).

I’m guessing that you can expect a absolute barrage of 130/30 fund marketing and advertising in the next few years. Personally, I’ll be keeping an eye on which companies are selling them and maybe buy their stock instead!

Have a great New Year’s Eve!