What are we looking for?
How the hot mutual funds of 2010 did this year.
Given the temptation to plow money into winners, let's examine their returns in a year when markets have struggled amid euro-zone debt woes and slowing growth.
The screen
We scrutinized the top 15 gainers in 2010, and their returns for this year to Dec. 16. U.S. dollar, and duplicate versions of the funds were excluded.
What did we find?
The hot funds have cooled big time.
After posting stellar gains last year in the 60- to 90-per-cent range, the stars of 2010 now face double-digit losses. Redwood Global Small Cap shed nearly 42 per cent. Sentry Mining Opportunity, which owns gold and base metals stocks, lost about 17 per cent.
Middlefield Precious Metals, the top performer in 2010, took a 33.3-per-cent haircut. The fund's small-to-mid-cap focus worked well last year, but not this year as investors sold off riskier stocks, said manager Dennis da Silva of Middlefield Capital Corp.
It didn't help that gold stocks underperformed bullion prices that were surging earlier this year. The yellow metal has since retreated to around $1,600 (U.S.) an ounce after hitting a peak of over $1,900 in September.
"I don't think the market ever truly believed the gold price was sustainable closer to $1,800 or $1,900," Mr. da Silva said. "I am using $1,500 for a near-term price [to value companies] and trending to between $1,100 and $1,200 in the next two to five years."
He sees a better year for the precious metals sector in 2012, partly because he expects more takeovers of junior players by senior miners. But "it could take a couple of years to recover the 33-per-cent loss [in my fund]" he acknowledged. "We are shooting for 10- to 25-per-cent per annum in returns based on the companies that we have selected. If the price of gold goes higher, there is potential for higher returns."
The lesson for investors, of course, is that it is not wise to chase performance. Funds with spectacular returns may keep flying higher the next year. Sooner or later, however, gravity comes into play.