If the stock market were truly efficient, Ron Muhlenkamp would be managing a lot more money, and many of his peers would be managing a lot less.
The eponymous Muhlenkamp Fund, which holds $2.7 billion in clients' assets, has generated returns averaging 16.9% a year over the last 10 years and 13.1% a year over the last five.
Now compare that with Fidelity Magellan. With $55 billion in assets, it's one of the world's best-known stock funds. Its 10-year average annualized return: 7.6%, less than half Muhlenkamp's results.
And over the last five years, Magellan has lost 4.2% a year.
There may be some good reasons why so many people have kept their money in Magellan all these years. But it would be pretty naive to think that inertia hasn't been a big factor.
And much of that inertia may be on the part of investors who own Magellan in 401(k) and similar employer retirement plans.
"Set it and forget it" has been the investment strategy of millions in retirement savings programs over the last 20 years. The performance results of Magellan and some other mega-funds, however, ought to serve as a potent reminder of the dangers of simply staying on auto-pilot -- particularly in a stock market that could spend many more years struggling to make progress.
It has been a standard joke in the investment business that people will spend far more time researching which car, TV set or weed whacker to buy than which mutual funds to entrust with their life savings.
That was funny in the 1990s, when it didn't matter much which fund you owned. Nearly everything was going up.
But 5 1/2 years into this decade, some investors have suffered mightily for failing to pay attention to their funds' performance, or for being unwilling to shift their portfolios, even modestly, to better cope with a changing market landscape.
You know who you are. And you know you can do better. It's never too late.
Many people have had a rigid buy-and-hold faith in the blue-chip Standard & Poor's 500 index. The general merits of indexing for the very long term are undeniable: low cost, broad diversification and tax efficiency.
But it's a painful fact that a buy-and-hold investor in the S&P 500 still hasn't made a dime in this decade on the money he had in the index on Dec. 31, 1999. Even including dividends earned, that investor has lost 2.2% a year on his savings, measured through the first half of this year.
By contrast, U.S. indexes of small and mid-size stocks hit record highs on Friday, continuing a winning streak over big-name stocks that began in 2000. The S&P 600, an index of small-company stocks, has risen 10.9% a year since the end of 1999.
As smaller stocks have won the investment derby over the last five years, fund managers who have had the flexibility to invest in any market sector have had an inherent advantage over peers who, by charter or preference, have remained focused on big-name stocks.
Ron Muhlenkamp, who manages his fund from the Pittsburgh suburb of Wexford, owns shares of global financial services giant Citigroup Inc. He also owns a stake in Fidelity National Financial Inc., a mid-size company that is a leader in real estate title insurance.
Muhlenkamp says that he doesn't care at all whether a broad market sector is hot or not. The only relevant question, he says, is: "What companies do you like?"
Lately, Muhlenkamp says, some very large stocks have shown up on his buy list, as he hunts for "good companies at cheap prices." He has put some money to work in drug and medical products maker Johnson & Johnson, for instance.
Given rising competitive pressures in the drug business, "We know that the future isn't going to be as good as the past" for companies like J&J, Muhlenkamp said. "But I still think the future is going to be better than the stock price suggests."
If he's right, it could help Fidelity Magellan's future performance too; Johnson & Johnson is a major holding in Magellan.
Indeed, asked about Magellan's track record, a Fidelity spokesman in Boston said the fund was banking on a comeback in the large-capitalization growth stocks that dominate the portfolio, and which have been heavily out of favor for the last five years.
Manager Robert Stansky believes that "at some point soon it's likely that the market may rotate and favor large-cap stocks again," the Fidelity spokesman said. "That's why Bob is confident in the fund's recent positioning."
The future may well be kinder to Magellan. But the problem for the fund's investors is that Stansky has a lot of ground to make up.
So here's a suggestion for any investor who has a large amount of savings in Magellan or any other stock mutual fund: Break loose of inertia. Focus on doing a better job of diversifying your assets.