Quite a while ago, we discussed drawdown analysis for mutual funds, and how understanding drawdowns can help in setting properly positioned stop losses… With two of my mutual funds dropping down against their stop loss levels, it’s time to revisit the analysis.

We’re looking at OAKMX and OAKIX, both long term value oriented mutual funds run by Oakmark Funds. OAKMX focuses on large cap value; OAKIX focuses on large cap international value. Here are the 3 year performance charts of the two mutual funds:

OAKMX 3 year chart OAKIX 3 year chart

Wow, good runs on both funds. Unfortunately, the dips on the right margin are 8.42% and 8.27% drawdowns respectively. Here are charts of the drawdowns in these funds since the early 90s.

OAKMX Drawdown OAKIX Drawdowns

The blue lines are the drawdown percentage (inverted so the values are positive) of the price of the funds relative to their all-time highs. The pink line is the average drawdown over time, the yellow line I will explain in a few paragraphs…

In both cases, their drawdowns are about average for “normal” pullbacks, though a couple more percent in either one would push it into a danger zone where I feel I would be at risk of losing as much as 35% of the money invested in these funds.

I am giving the funds a little more room to wiggle, and the yellow lines on the chart are the approximate positioning of my stop-losses, or where I will start to consider selling these funds.

Besides price action, I have to be conscious of the tax implications. Both of these funds have been long-term holdings for me, so they should benefit from lower capital gains tax rates. Additionally, if one were to believe that capital gains tax rates could be rising soon (were the Democrats in power), one might be more inclined to sell now and benefit from the lower rates before they rise…