For Mutual Funds, It Was Boom and Bust Year
For mutual funds, 1987 was the ultimate roller coaster. They began 1987 riding an unprecedented boom in sales and performance. But they ended the year hoping that the worst was over.
Equity funds--blasted by the Black Monday stock market crash--posted their worst performance since 1981 and again failed to beat the major market indexes. Bond and income funds, for long the most popular mutual fund category, barely posted a gain for the year as bond prices were pummeled in 1987 by rising interest rates.
Investors, their confidence shaken by the bond slump and stock crash, curbed their appetite for funds considerably. Fund sales, which set records in the first half of the year, tailed off sharply toward the end.
Shift in Emphasis
Formation of new funds also slowed dramatically, after a period in 1986 and early 1987 when new funds were started at the rate of one each day. Industry profits may suffer as many fund companies added staff and other overhead in recent years anticipating continued good times.
The growing investor skittishness also started a shift in emphasis. Conservative funds, such as money market funds and short-term bond funds, boomed as nervous investors looked for safe havens from funds investing in stocks and long-term bonds. Fund advertisements, no longer able to boast about high returns, began focusing more on safety and convenience.
“A lot of people thought that funds had a built-in return of 20% a year,” said A. Michael Lipper, president of Lipper Analytical Services, a Summit, N.J., firm that tracks fund performance. But now funds “are going to be tougher to sell. Sales will not be as good as they have been.”
The extraordinary sales and total returns of the past few years “are not sustainable,” concedes Alfred P. Johnson, chief economist of the Investment Company Institute, a Washington-based trade group for the fund industry.
But the fund industry is not likely to suffer too deeply, because fund companies offer far more choices for investors than a few years ago, ranging from conservative money market funds to risky “junk bond” funds.
“People won’t be pulling their money out completely, just moving it from one type of fund to another,” said Kurt Brouwer, president of Brouwer & Janachowski, a San Francisco investment advisory firm that selects funds for clients. “Where else are they going to go with their money?”
Nonetheless, the contrasts between 1986 and 1987 are like feast and famine. Take equity funds. In 1986, every type of equity fund posted gains. The average general equity fund rose 13.39%, according to Lipper Analytical. That trend continued through mid-October of 1987, as those funds were up about 20% for the year at that point.
Worst Performance Since 1981
But the crash left equity funds with only a measly 1.49% gain for the year through Dec. 23, likely to make 1987 their worst year since 1981, when they fell 1.33%, according to Lipper Analytical. Adding insult to injury, equity funds again failed to keep pace with the Standard & Poor’s 500-stock index and the Dow Jones industrial average, which were up 4.45% and 5.79% through Dec. 23, even without dividends reinvested.
Equity funds generally failed to beat these two indexes during most of the 1982-87 bull market, in part because the market was led by the blue chip stocks in the S&P; 500 and the Dow, while equity funds were more diversified into secondary issues.
The year also was a disappointment for bond and other income funds that invest in fixed-income securities. They were up only 0.62% through Dec. 23, a result largely of rising interest rates in the spring and summer, which eroded bond prices enough to virtually offset their yield income.
By contrast, those funds rose a hefty 12.69% in 1986, when interest rates fell and investors gained from both yield income and rising bond prices.
Fund Assets Also Declined
No wonder sales began to drop. Sales for all equity and income mutual funds (excluding money market funds) slowed to about $188.3 billion in 1987, down from a record $215.8 billion in 1986, according to estimates by the Investment Company Institute. Most of the drop came in the last three months of the year, ICI figures show.
Fund assets also declined, to $769.6 billion by the end of November from a record $848.4 billion at the end of August.
There were some bright spots for 1987, however. The year’s leading fund group was gold funds, which invest in gold mining stocks and the metal itself. They posted a 34.08% gain, thanks to fears of higher inflation, the falling dollar and worries about a too-high stock market. Five of the year’s top 10 funds were gold funds.
In second place were option growth funds (up 32.72%), a small group of four funds which invest in options. They owed their strength largely to one fund, Oppenheimer Ninety-Ten, which won honors as the year’s top individual performer with a 94.77% gain through Dec. 23.
Other strong groups included world income funds (also called international bond funds) and international stock funds, up 17.47% and 12.69%, respectively. By investing in foreign bonds and stocks, they benefited when the sharp declines in the dollar boosted the value of foreign securities.
It also was a remarkable year for Milton W. Berg, who managed not one, not two, but three of the year’s top 10 funds: Oppenheimer Ninety-Ten, Oppenheimer Gold & Special Minerals (up 71%) and Oppenheimer Premium Income (up 46.59%).
Sold Stocks Before Crash
Berg correctly timed the market crash. Gold & Special Minerals and Premium Income sold stocks before the collapse, reinvesting after it. The Ninety-Ten fund--which derives its name because 90% of its portfolio is in conservative money market instruments while the other 10% invests in options--was in call options in the early part of the year when stocks were surging higher, then shifted into put options just before the crash. Call options allow an investor to profit from rising stock prices, while put options work well when prices are falling.
To do well in 1988, however, Berg needs continued volatility in stocks and the ability to time its swings. “If the market (stays flat), it will be hard to duplicate this performance,” he conceded.
What funds will be popular in 1988? Investment adviser Brouwer suggests that funds like Ninety-Ten, which use futures and options to hedge risks in stocks, are likely to be favorites this year. “Whatever worked well in the last period, people will start buying,” he said, although noting that no investment manager can correctly anticipate market swings all the time.
Other popular funds, analyst Lipper predicts, will include asset allocation funds, balanced funds and growth and income funds. Each reduces risk by investing in a mix of stocks and bonds. Asset allocation funds also buy precious metals and other investments.
But investors should be careful not to be too conservative, Lipper said. “At some point there will be another up market, but a lot of people won’t be on board that train,” he said.
Performance Goes in Cycles
Lipper also suggests that investors be wary of investing in funds simply because those funds did well last year. Fund performance often goes in cycles; last year’s winners could become this year’s dogs, and vice versa, Lipper said.
Such was the case with funds investing in utility stocks. They were one of the top groups in 1986 with a 22.69% gain. But they were the worst group in 1987, losing 7.23% through Dec. 23. Gold funds also illustrate this pattern. They were 1987’s top-performing group but were the worst in both 1985 and 1984, Lipper said.
International stock funds could follow suit, Lipper suggested. They were stars in 1986 and 1987, thanks to the falling dollar. But if the dollar bottoms this year and begins to rise again, those funds could be among the dogs of 1988.
1987 WINNERS AND LOSERS 10 BEST PERFORMING MUTUAL FUNDS
(through Dec. 23, 1987)
% chg. Oppenheimer Ninety-Ten +94.77 DFA Japan Small Company +88.10 Oppenheimer Gold & Special Minerals +71.00 New England Zenith Capital Growth +56.57 IDS Precious Metals +50.17 Franklin Gold Fund +49.96 DFA United Kingdom Small Company +47.39 Oppenheimer Premium Income +46.59 Van Eck Gold/Resources +45.43 Lexington Goldfund +44.72
10 WORST PERFORMING MUTUAL FUNDS
(through Dec. 23, 1987)
% chg. 44 Wall Street Equity -38.09 Kaufmann Fund -37.16 Fidelity Select-Brokerage -36.02 44 Wall Street -33.01 Strategic Capital Gains -31.04 Dividend/Growth-Laser & Adv Tech -30.28 Security Omni -26.12 American Capital OTC -24.94 Benham Target 2015 -23.03 Wealth Monitors -22.73
Source: Lipper Analytical Services
HOW DIFFERENT FUND CATEGORIES FARED
% chg. % chg. 12/31/86- 12/31/85- 12/23/87 12/31/86 Gold +34.08 +36.07 Option growth +32.73 +11.65 World income +17.47 NA International +12.69 +53.25 Natural resources +6.43 +7.70 Global +4.37 +31.44 Balanced +3.47 +17.22 Science and technology +3.12 +8.22 Growth and income +3.02 +16.16 Growth +2.35 +13.04 Capital appreciation +2.16 +13.18 Fixed income +0.62 +12.69 Option income +0.36 +8.19 Income -0.12 +13.85 Equity income -1.73 +14.48 Health -2.03 +18.65 Specialty -2.68 +14.00 Convertible securities -5.82 NA Small company growth -5.86 +5.64 Utilities -7.23 +22.69 Average general equity funds +1.49 +13.39 Average for all equity funds +3.03 +15.90 Average for all equity and fixed income funds +2.28 +15.07 S&P; 500 +4.54 +14.62
Source: Lipper Analytical Services Inc.
