Timing Funds Take Emotion Out of Investing
Market timing is the chief problem facing mutual fund investors. Nothing’s so vexing as trying to decide whether you should exit stock funds for the safety of money market portfolios, and when.
Timing-oriented mutual funds attempt to solve this dilemma. These conservative portfolios aim to reduce risk for investors by switching primarily or entirely to cash during perilous periods and back to equities when the market’s moving higher. That lofty ideal is easier said than done, however. “I haven’t found a timing system that works in all markets,” admits Paul Merriman of Merriman Investment Management, a Seattle company that offers four timing-oriented portfolios.
Most equity funds stay more or less fully invested in stocks at all times--a reflection, at least in part, of how hard it is to pick opportune times to buy and sell. The problem with exiting the market is that you have to get back in again--preferably at a lower price. “You take a big chance when you sell something and try to buy it back cheaper,” says Roger Engemann, head of the Pasadena Growth Fund, which stays close to fully invested most of the time.
The market, Engemann points out, doesn’t appreciate steadily but tends to rise in spurts that usually last for just a few weeks at a time. In 1989, for example, the Dow Jones industrial average rose 584 points, but about 460 of those points came in just two relatively brief clusters: a four-week period in January and a five-week span in July and early August. Market timers risk missing those spurts. Certainly, it’s hard to beat a buy-and-hold approach during a prolonged bull market such as the one that characterized most of the 1980s. But stocks have been banged up lately, and some forecasters see more carnage ahead. During bearish phases, a traditional buy-and-hold strategy can backfire. In a strong downdraft, the advantage shifts to defensive investments, including market-timing funds.
Most of these portfolios have held up well since stocks began their summer swoon. As a group, they’ve cushioned investors from the worst of the decline, which in late September reached nearly 600 points on the Dow industrials. (Actually, not all timing funds are equity-oriented; a few seek opportune moments to move in and out of bonds.)
Most timers don’t trust their own instincts to get out of harm’s way. Instead, they follow quantitative models that have served them in the past. These models are based on trends in the stock market, economy, interest rates, investor sentiment and other factors. Each timer keys on his own set of indicators. Some funds, such as the Merriman portfolios, follow more than one timer’s system.
The whole idea is to wring emotion out of investment decisions. Most people, timers say, suffer from the uncanny knack of buying high, when the outlook appears brightest, and selling low, when pessimism is the rage. “Our process is computerized and systematic, with no subjective override,” says David Rights, head of Wyncote, Pa.-based Rightime Econometrics.
Significantly, timers don’t try to buy at the extreme bottom or sell at the very top. Rather, they merely want to cash in on most of the gains and skirt most of the losses. “We aim for 50% to 70% of the upside, while avoiding the downside,” Rights says. Merriman points out that his funds tend to sit on the sidelines about 40% of the time. “They’re designed for people who want a piece of the action along with peace of mind,” he says.
Assuming that the market’s recent downtrend persists, timing funds will probably become more appealing. In fact, a prolonged slump would tend to push them toward the top of the mutual fund performance charts. However, several factors work against them from the standpoint of attracting more investors.
For starters, most timing funds are small. Only a handful count more than $50 million in assets. Funds with small asset bases have trouble achieving economies of scale. As a result, performance can be dragged down by relatively high expenses.
Ironically, when timing funds look best--periods of market weakness--the public tends not to invest as much. Rights says his funds have had moderately positive cash flow this year, but he doesn’t expect to see a lot of new money until the market marches higher. “People are still afraid and reluctant to invest,” he says.
In addition, market timing is a relatively new approach. Consequently, most such funds lack a long-term track record, let alone one dating back to an extended bear market such as 1973-74 or even 1981-82. The Transamerica Lowry Market Timing Fund, one of the oldest in the group, debuted in 1984. It has posted a total return of only about 30% since, substantially under-performing the average stock portfolio during that span--a generally bullish period that favored buy-and-hold investing.
Most of the approximately 30 market-timing portfolios don’t date back even three years, making it difficult to envision how they would have fared during the October, 1987, market crash.
“I like to see funds with good performance records over at least a three- to five-year period,” says Michael Trank, a personal finance specialist at Little & Gray, an accounting firm in Irvine. Nevertheless, he has recommended some Merriman funds for clients even though the portfolios are less than three years old.
In all fairness, the advisers who run timing funds have been managing private money for years. Some, such as Merriman and Martin E. Zweig, head of the Zweig Series Trust fund group in New York, are also investment newsletter writers whose performance has been independently monitored by the Hulbert Financial Digest in Alexandria, Va. Hulbert, in fact, ranks Zweig No. 1 for the 10-year period ending June 30.
TIMING FUNDS GAIN THE EDGE
Mutual funds that try to time the market tend to lag during bullish periods and excel during bearish phases. As such, they’re most suitable for investors who seek safety first and appreciation second. This chart lists some of the larger equity-oriented timing funds, along with their investment results in recent years. Notice how most fared better than stock funds in general during the first nine months of 1990, a difficult market environment.
(9 months) Sales Fund ’87 ’88 ’89 ’90 Fee Flex-Funds Growth +11% -6% +10% -0% None* (800) 325-FLEX Merriman Timed Asset Allocation -- -- +7% +1% None Merriman Timed Blue Chip -- -- +10% +1% None Merriman Timed Capital Appreciation -- -- +4% +1% None (800) 423-4893 Monitrend Value -4% -1% +4% +2% 3.5%* (800) 251-1970 Rightime +20% -1% +11% +1% None* Rightime Blue Chip -- +3% +20% +1% 4.75%* Rightime Growth -- -- +19% -13% 4.75%* (800) 242-1421 Schield Timed Asset Allocation -- +0% +6% -5% 1.5%* (800) 826-8154 Transamerica Lowry Market Timing +17% +1% +18% -9% 4.75%* (800) 999-3863 Zweig Priority Selection List -- -- -- -9% 5.5%* Zweig Strategy -- -- -- -6% 5.5%* (800) 272-2700 Lipper General Equity Fund Average +0% +14% +24% -13%
* Fund charges a 12b-1 fee, generally below 1% a year.
Note: Minimum initial investments for the funds listed range from $1,000 to $2,500.
