Patience paid off for fund investors in 2016

NEW YORK _ Last year was a fantastic one for fund investors, at least for those resilient enough to hold on through the stomach-churning turns the market took.

Most mutual funds, 87 per cent of those tracked by Morningstar, made money in 2016, even though many investors were bracing for the opposite early in the year. And the gains were widespread. Whether they focused on stocks of big U.S. companies, bonds from emerging markets or gold bars stored in a London vault, funds delivered positive returns to investors who stuck with them through the roller-coaster year.

Lurching up and down with the rest of the market was the largest mutual fund, Vanguard’s Total Stock Market Index fund, which sits at the core of many 401(k) accounts. It sank at the start of the year on worries that a sharp slowdown in China’s economic growth would pull down the rest of the global economy. By the sixth week of the year, the fund had lost more than 11 per cent.

Surprises kept coming in ensuing months, giving uneasy investors even more temptation to bail. They included the U.K. decision to leave the European Union and the U.S. election of Donald Trump to the White House. Through the first 11 months of the year, nervous investors pulled nearly $57 billion out of U.S. stock mutual funds and exchange-traded funds, according to Morningstar.

But markets, and funds, shrugged off each of the shocks and eventually climbed higher. Vanguard’s Total Stock Market Index fund ended up with a 12.5 per cent return for 2016, its best performance in three years and comfortably above its average annual return of 9.5 per cent over the last two decades.

Here’s a look at how various types of funds fared during the year:


Funds that focus on the smallest stocks packed the biggest punch.

The average small-cap value stock fund returned 25.8 per cent, more than double what funds that track the S&P 500 index of large-cap stocks did. The Hodges Pure Contrarian fund was one of them, returning 70.5 per cent. It looks for stocks that have been given up for dead by much of Wall Street and seem poised for a turnaround. One of its recent investments was U.S. Steel.

“Even with the run-up in prices, we still think there are some opportunities,” says Eric Marshall, one of the fund’s managers. He’s particularly optimistic about small-company stocks. Those companies, he says, stand to benefit most from the lower tax rates and deregulation that president-elect Trump has proposed.

Even though the stock market is close to marking its eighth anniversary since bottoming out after the financial crisis, Marshall says he sees more gains ahead. He points to those jittery investors who pulled their money out of U.S. stock funds last year. “Market tops occur when the last person is done buying, not when the last person is done selling,” he says.

Foreign stock funds attracted some dollars last year, but not a lot: $667 million through the first 11 months.

These funds were actually some of the most likely to have posted losses last year. Just over a quarter of foreign stock funds lost ground last year, versus only 5 per cent of U.S. stock funds.


Nearly all bond funds gained ground, with 98 per cent up for the year. The largest returns came from the riskiest kinds of bonds. High-yield bond funds returned an average of 13.3 per cent, rivaling the returns of many stock funds.

These funds invest in debt issued by companies with weak credit ratings, ones that have to pay higher interest rates to attract investors. They also can be full of bonds from the oil and mining industries, whose prices can turn quickly with the prices of commodities.

Emerging-market bond funds were also strong, returning an average of 10 per cent.

The bond funds that have traditionally been seen as among the safest had some of the weakest returns. Treasury bond funds scraped by with meagre returns, though that could be considered a victory after many of them dropped during the last two months of the year. That’s because Treasurys, while low-risk in terms of potential defaults, are most at risk from higher interest rates.

When rates rise, prices for bonds that are already in circulation fall. That’s because their yields are lower than those of the newly issued bonds. Rates rose following Trump’s surprise victory as investors anticipated that faster inflation and economic growth are on the way.

The average intermediate-term government bond fund lost 2.5 per cent in the last three months of the year, paring back gains made earlier in the year. By the end of 2016, the average such fund returned 0.9 per cent.

Most investors don’t restrict themselves to Treasurys. They buy funds that mix in corporate bonds, which have higher yields and can be less sensitive to changes in interest rates. The average such intermediate-term bond fund returned 3.3 per cent, though it also struggled following the November election.