Two Cautious Winners
Yes, many individual stocks are off 20% to 40% from their 1990 highs in this bear market. The long-term investor in stock mutual funds, however, needs to keep those figures in perspective: You didn’t buy at the high, and if you’ve been in the funds all year, you’re probably not doing so badly--though you certainly ought to be prepared for a lot worse.
Let’s say you bought into a typical stock fund in 1988. In 1989, the average fund jumped 24%. So far this year, the average fund is down 10.3%. So you haven’t even given back the 1989 gain.
Those are averages, which means your funds might be doing a lot better or worse. But the average 10.3% stock fund decline so far this year at least provides a good reference point: You still have time to act, if you so choose.
For example, say you’ve stuck with your funds for many years, but now expect a severe bear market--one that might last another year or more. You might want to sell a portion of your holdings to raise cash for investing opportunities later.
There is no crime in taking some profits, especially for investors who have enjoyed the full ride of the 1980s bull market. There are tax considerations, of course, but they should be secondary to your investment outlook.
But what is the smart outlook now? Here are the views of two stock fund managers, both of whom have managed to beat the market so far this year, even though their views are almost at polar opposites. One or the other might echo the concerns of the vast majority of investors today:
Ted Gemlich’s IDS Stock fund, based in Minneapolis, is down just 4% for the year. Gemlich has stuck with many of the big-name consumer growth stocks, such as Pepsico, Philip Morris and Dayton Hudson. He also has kept a heavy weighting in energy stocks, such as Halliburton and Mobil, and in health-care stocks.
If there’s a lesson in Gemlich’s strategy, it’s that diversification across industry groups pays off--though admittedly, you have to pick the best industry groups. Gemlich also has built a large cash cushion--20% of the fund’s $1.3 billion in assets--as a prudent hedge against a falling market. That cash cushion may grow a little more, but for the most part Gemlich plans to stick with his 70-some stocks, even through a recession. Having already pruned his holdings, he says, “I wouldn’t sell a lot more.”
At the same time, he says, he isn’t rushing to buy stocks right now, even though some values look compelling. “I don’t see any hurry at this point,” he says. As the bear market progresses, he figures he’ll be able to buy a lot of stocks cheaper later on.
On the other side of the fence is Henry Van der Eb, who runs the $260-million Mathers stock fund in Bannockburn, Ill. Van der Eb started raising cash in 1989 and has had about 85% of the portfolio in cash since the start of the year. Thus, he’s escaped the market’s plunge, and his fund is up about 7% year to date.
Van der Eb figures that the debt spiral of the 1980s will have to be unwound, and he sees it as a tough experience for the economy. “This whole debt thing has to slow down, and it’s not going to slow down just over the next month but over the next year or two,” he says. “There’s going to be a lot of pain.”
Like Gemlich, Van der Eb is content to wait for much better buying opportunities later. There are only a handful of stocks in his portfolio now, one of which is Torrance-based International Technology. The company performs such tasks as assessing and decontaminating hazardous waste sites. Though earnings were erratic in the late 1980s, the company has been on a roll since mid-1989. It earned 42 cents a share in the year ended March 31 on revenue of $307 million. Van der Eb thinks 60 cents is likely this year, and 80 to 85 cents the year after. “It’s one of the few companies that is relatively immune to the economy,” he says.
International Technology’s stock has run up from $4.625 in 1989 to $9 now, and it was as high as $12.125 in July. It’s traded on the New York Stock Exchange.
Neither Gemlich nor Van der Eb can guarantee that they’ll know exactly when it’s time to start buying again, of course. But their caution says a lot about the mood of many big investors today: If you haven’t taken at least some of your long-term profits, you should. And with the economy sinking, now is not the time to jump head first into stocks. As more big investors come over to that point of view--which seems inevitable--the bear market will become a self-fulfilling prophecy.
Briefly: Die-hard numbers junkies may notice that the average stock fund’s 10.3% year-to-date decline is worse than the New York Stock Exchange composite index’s 9.8% loss. Both figures included reinvested dividends. If the average portfolio manager has kept at least 10% of fund assets in cash this year, it may appear to be a real indictment of fund talent that the typical fund is under-performing an all -stock index. However, the funds’ return is after deducting management fees, which generally run about 1%. So you can figure that the average fund’s actual performance is closer to a 9.3% loss. Whether the funds should be doing better than that, given their cash levels, is still open for debate.
FUNDS SCORECARD How various categories of stock and bond mutual funds fared in 1989 and so far this year, versus the average NYSE stock:
Category 1989 Year to date* Fixed income +9.4% +1.1% Growth and income +23.2% -9.0% Growth stocks +25.4% -10.1% Intl. stocks +22.3% -11.0% Small-company stocks +23.0% -13.5% Gold-oriented +22.5% -15.5% NYSE composite index +28.0% -9.8% General stock fund +24.0% -10.3%
* through last Thursday
Source: Lipper Analytical Services
