Returns Are Good Despite the Crash : Many Stock Fund Investors Profit
Individual investors often err by unloading investments when prices bottom and buying when prices top out--just the opposite of what they should do. If the latest mutual fund results are any indication, the small investor may be erring again.
Sales of mutual funds, particularly of those investing in stocks, have fallen to their lowest levels in more than three years as investors remain skittish following October’s crash. But investors who stuck it out in stock funds continued to reap rewards, although second-quarter profits were not as robust as those of the first quarter, according to figures released Thursday by Lipper Analytical Services, a Summit, N.J., firm that tracks mutual funds.
General equity funds rose 5.4% in the April-June quarter, following a 7.77% rise in the January-March period. All funds, including bond funds, rose an average of 3.56% in the latest quarter.
“The numbers are pretty good, considering funds’ long-term record and what we suffered last year,” said A. Michael Lipper, president of Lipper Analytical. He noted that the return for equity funds of 13.68%--in the first half alone--compares favorably to the 9.6% average annual return for the last five years.
Majority Posted Gains
“People should have been buying after the crash,” said Kurt Brouwer, president of Brouwer & Janachowski, a San Francisco investment advisory firm. He and other experts said it may take a few more hot quarters to lure new money from individual investors back into stock funds--probably just when they should not be buying.
Sales of stock and bond mutual funds totaled $7.1 billion in May, the lowest level since March, 1985, when sales totaled $6.1 billion.
All but three of the 20 fund groups tracked by Lipper posted gains for the quarter. The top performing groups were funds investing in science and technology stocks, up 7.47%. Grabbing runner-up honors were small company growth funds, up 7.02%, slipping from first place in the first quarter when they gained 14.05%.
However, not all the news was good. Portfolio managers of general equity funds failed to beat the two leading stock market indexes, ending a streak of two consecutive quarters in which they had--the first time they had accomplished such a feat in five years. With dividends reinvested, the Standard & Poor’s index of 500-blue chip stocks rose 6.66% while the Dow Jones industrial index posted an 8.78% gain.
“It’s tough to beat the market on the way up on a prolonged basis,” Lipper said, noting that fund results are hurt because they must maintain cash holdings and account for management fees. That puts them at a disadvantage against raw market indexes that in effect are fully invested and do not have management fees.
Reduced Inflation Fears
Investors in fixed-income funds--the most popular fund group--also had little to shout about. These funds, which invest in corporate bonds, government securities and other fixed-income instruments, posted only a modest 1.34% gain. They were hurt by rising interest rates, which dropped prices of bonds in their portfolios, offsetting some of their interest income.
Also singing the blues were investors in world income funds and gold funds.
World income funds, which invest in U.S. and foreign bonds, sank to last place in the latest quarter with a 2.32% decline. They had been the best performing group in the fourth quarter of 1987. Their decline was due largely to recent gains in the dollar, which reduced the value of securities denominated in foreign currencies.
Gold funds, which invest in stocks of gold-mining companies, dropped 0.40% in the latest quarter, thanks to reduced fears of renewed inflation. They had been 1987’s top performing group.
Joining gold and international bond funds in the minus column were international stock funds, which invest in overseas equities. They fell 0.52%, again due to the resurgent dollar.
Small Companies Touted
Eight of the 10 worst performing funds in the quarter were either gold or international funds. Their fall from the top to the bottom again illustrates the cyclical nature of fund performance. Accordingly, many advisers say, investors should be wary of buying the funds or fund groups that are the hottest in any given quarter.
However, an exception to that rule may be made in the case of small company growth funds, many advisers say. They are confident that these funds will continue to outperform most other groups.
“You should stay with small company funds; this trend will go on for at least a year or so,” said Sheldon Jacobs, publisher of No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y. If the market goes down, small company funds “will go down less,” he contended.
Among individual funds, the quarter’s big winner was Kaufmann Fund, an aggressive growth stock fund that three years ago had assets of only $5,000 until its current management began to turn it around.
Big Winners
This no-load (commission free) fund, which is up to $2.8 million in assets, rose 25.93% in the quarter. It currently is invested in only 18 stocks, seeking small companies “with unique positions in the markets they serve,” said Lawrence Auriana, co-portfolio manager.
Chantal Phamaceutical, the fund’s largest holding--comprising 28% of its portfolio--gained 44% for the quarter, Auriana said. Chantal is developing a drug to treat acne and baldness.
Small funds like Kaufmann were not the only big winners. The nation’s five biggest stock funds also beat the S&P; 500, noted Don Phillips, editor of Mutual Fund Values, a Chicago investment advisory service.
Fidelity Magellan, the biggest stock fund with $8.4 billion in assets, gained 8.46%, followed by Vanguard Windsor ($5 billion), up 13.27%; Fidelity Puritan ($4.1 billion), up 6.86%; Investment Co. of America ($3.9 billion), up 10.21%, and Fidelity Equity Income ($3.8 billion), up 8.37%.
The biggest loser was American Asset Yield Fund, a tiny equity income fund with only $300,000 in assets. The fund nose-dived 45.95% in the quarter.
MUTUAL FUND PERFORMANCE Appreciation plus reinvested income and capital gains)
QUARTER ENDED June 30, 1988 Top Performers Kaufmann Fund +25.93% Sherman, Dean Fund +16.67 Brandywine Fund +15.43 Integrated Equity-Aggr Growth +15.28 Hartwell Emerging Growth +14.55 FPA Capital +14.53 SFT Odd Lot Fund +14.15 Gabelli Growth +14.08 Constellation Growth +13.70 Windsor Fund +13.27 S&P; 500 (dividends reinvested) +6.66 All funds average +3.56 Worst Performers American Asset Yield Fund -45.95% Strategic Investments -18.82 United Services Gold Shares -18.51 Intl Cash--Swiss Franc Cash -11.56 Intl Cash--D-Mark Cash -10.47 Fidelity Select--Energy Service -10.40 Japan Fund -8.68 Intl Heritage Overseas Inc -8.51 Transatlantic Income -8.21 International Investors -7.82 YEAR ENDED June 30, 1988 Top Performers DFA Japan Small Company +66.81% GT Japan Growth +47.33 Oppenheimer Ninety-Ten +41.55 Oppenheimer Gold & Sp Minerals +33.35 Ariel Growth +26.84 Putnam Global Govt Income +25.20 Dreyfus Strategic World +21.54 Baron Asset +20.73 PaineWebber Master Global +19.94 Founders Frontier +18.64 S&P; 500 (dividends reinvested) -6.91 All funds average -1.78 Worst Performers American Asset Yield Fund -75.99% 44 Wall Street -44.36 44 Wall Street Equity -43.27 Steadman Oceanographic -41.95 Strategic Investments -39.70 Fidelity Select--Energy Service -36.97 United Services Gold Shares -36.45 American Capital OTC -34.33 Bowser Growth -30.77 American Capital Growth -30.53 FIVE YEARS ENDED June 30, 1988 Top Performers Merrill Lynch Pacific +299.23% Japan Fund +290.44 BB&K; International +217.98 Vanguard World--Intl Growth +215.28 Trustees’ Commingled Intl +208.75 T. Rowe Price Intl +192.46 Putnam Intl Equities +176.70 Prudential-Bache Utility +170.58 GT Pacific Growth +169.35 Scudder International +167.94 S&P; 500 (dividends reinvested) +97.74 All funds average +63.93 Worst Performers 44 Wall Street -86.34%
American Heritage Fund -63.12 Strategic Investments -57.71 44 Wall Street Equity -54.17 Steadman Oceanographic -53.18 Steadman American Industry -45.23 Industry Fund of America -43.40 First Investors Discovery -42.58 United Services Gold Shares -42.31 First Investors Fund for Gwth -34.37 GROUP PERFORMANCE (periods ended June 30, 1988)
Quarter Year Five Year Science & Technology Funds +7.47% -8.62% +22.15% Small Company Growth Funds +7.02 -4.90 +33.34 Growth Funds +5.56 -6.26 +53.54 Utility Funds +5.53 +2.57 +111.39 Specialty Funds +5.44 -6.51 +71.13 Capital Appreciation Funds +5.38 -6.44 +34.52 Option Income Funds +5.31 -3.63 +52.78 Growth & Income Funds +5.24 -3.51 +80.01 Convertible Securities Funds +4.73 -3.17 +61.70 Balanced Funds +3.44 -0.82 +83.53 Equity Income Funds +3.32 -3.58 +83.66 Income Funds +2.81 +3.54 +66.99 Natural Resources Funds +2.31 -9.64 +49.23 Global Funds +1.84 -5.65 +108.04 Health/Biotechnology Funds +1.43 -15.40 +41.81 Fixed Income Funds +1.34 +5.96 +68.28 Option Growth Funds +0.47 +5.25 +58.87 Gold Oriented Funds -0.40 -14.18 -2.14 International Funds -0.52 -1.99 +179.79 World Income Funds -2.32 +10.35 +112.63 S&P; 500 (dividends reinvested) +6.66 -6.91 +97.74 All funds average +3.56 -1.78 +63.93
Source: Lipper Analytical Services
