Market Watch : If Historical Patterns Hold True, 1990 Mutual Fund Losers May Rebound in 1991
Two steps forward and one step back.
For stock mutual fund investors, that has been the pattern most of the last 15 years--two strong years, then a bummer.
The 1990 bummer was the worst since 1974. The average general stock fund dropped 6.3% last year, according to fund tracker Lipper Analytical Services in New York. The loss would have been far worse without the market rebound late in the year, which lifted the average fund 7.4% in the final three months.
But if the historical pattern holds, stock fund investors ought to be enthusiastic right now rather than despairing, some experts say: Even if stocks go lower in the short term, the odds favor them bouncing back either later this year or in 1992, when the economy begins growing again.
So this is a time for smart investors to be shopping for funds that they’ll want to own into the mid-1990s and beyond. The question is, where to shop?
In any other market, if the price of something goes down, consumers tend to buy more. With stocks, investors are far more likely to be suspicious of lower prices, and avoid them. To a certain degree, that’s healthy. For example, investors who stayed away from falling stocks in the bank and S&L; fields last year were wise to do so, because they’ve continued to slide.
But in a bear market, almost everything gets knocked, including many stocks that deserve better. Fund managers are busy right now trying to identify the stocks that will lead in the next bull market.
Individual investors, in turn, should be looking now for funds that are off sharply from their 1990 highs, yet stand an excellent chance of rocketing when the market turns. In fact, some groups may already be turning: Science and tech stock funds jumped 13.6% in the fourth quarter.
Here’s a look at some of the downtrodden fund categories and their prospects:
* Small-company growth funds--The average small-company stock fund lost 9.9% last year, according to Lipper. In general, small stocks have performed far less well than their big-stock counterparts since 1984.
Why believe that the trend is ending? Fund managers admit that they can’t offer any proof. But prices of many small stocks are so low that, even if they drop another 15% to 25%, a buyer now should still be handsomely rewarded over the next few years, many experts insist.
Preston Athey, a small-stock picker for T. Rowe Price Associates mutual funds in Baltimore, notes that investors now can buy many small stocks for about the same ratio of price to earnings that they’re paying for many bigger stocks--even though the small companies’ growth potential is much more dramatic.
He cites auto insurer Twentieth Century Industries, based in Woodland Hills, as an example. The stock sells for about $27, or less than 10 times annual earnings. Athey says that’s too cheap for what he calls “an excellent franchise” in the insurance business.
Ray Hirsch, who runs the IDS Discovery small-stock fund in Minneapolis, says many of the big-name growth stocks that have led the market in recent years “are pretty full-valued now, I would argue. So the best values among growth stocks are in the small-company area.”
His $150-million fund finished 1990 about even, bucking the losing trend. Lately, Hirsch has been buying such smaller stocks as software firms Cadence Design ($23.375-NYSE) and Legent ($28.75-OTC) and semiconductor equipment maker Applied Materials ($22-OTC).
Among small-company funds, Mutual Fund Values newsletter Editor Don Phillips says bargain-hunting investors should consider such well-known names as Pennsylvania Mutual (based in New York), Nicholas Limited Edition (Milwaukee) and Templeton Global (Kansas City).
* International funds--Everywhere you look in the foreign-fund universe, there’s carnage. As those markets were slammed last year, the mutual funds that target those markets also plunged.
The Nomura Pacific Basic stock fund, for example, tumbled about 16% for the year. Yet over the past five years, that fund was the fourth-best performing stock fund of all, up 181%, Lipper says.
Foreign markets may suffer again this year, of course, especially if war breaks out in the Mideast. But this area is ripe now for value-hungry investors with a long-term view, experts say.
Lipper Analytical’s Michael Lipper also advises taking a global perspective, not just a regional one. “I think it’s a mistake for people to be enthusiastic about Europe while being down on the Pacific,” he says. The Pacific Rim economy shouldn’t be underestimated, Lipper says.
* Gold funds--These funds typically buy gold-mining stocks, which are far more volatile than the actual price of gold. Last year, as gold fell 2.1% in price, the average gold-stock fund lost 22.1%, worst of any stock fund category.
Is it time to buy? With a recession bearing down and deflation a possibility, it doesn’t look good for gold. While the metal could soar if a U.S.-Iraq conflict erupts, Mark Johnson, senior analyst at the USAA Gold fund in San Antonio, cautions that “in recent years, upward spikes related to international turmoil have tended to be short-lived.”
On the other hand, if you’ve wanted to buy a bit of gold for the long haul, today’s depressed gold fund prices may be worth a look.
“The bulk of our investors do seem to be in for the longer term,” says Johnson. Good thing: His fund dropped about 30% last year.
If you own mutual funds, 1990 probably wasn’t good to you. But the year’s losses may portend better returns ahead. Here, a look at the fund winners and losers of 1990, based on data from 1,800 funds compiled by Lipper Analytical Services.
4TH QTR.’S WORST FUNDS
Fund name: Return Strategic Silver: -29.0% Dean Witter High Yeild: -25.8 Financial Port: Energy: -17.4 Metlife SS Eq: Global Engy: -16.0 First Australia: Pac Rim: -15.2 Strategic Investments: -14.8 Fidelity Sel Energy Serv: -14.3 Pioneer Gro: Gold Shares: -14.1 Van Eck: Gold/Resources: -13.9 Strategic Gold/Minerals: -13.7
YEAR’S WORST FUNDS
Fund name: Return Sherman, Dean Fund: -44.1% Steadman Oceanographic: -43.8 Strategic Investments: -42.4 Dean Witter High Yield: -40.1 Calvert Fund: Wash Area: -38.1 Prudent Speculatr: Levrgd: -37.6 Nikko Japan Tilt FD: -37.0 Bull & Bear Spl Equities: -36.4 US: Gold Shares: -34.2 DFA Group: Japan Small Co: -33.4
