How to Make Sure Investment Stays on Course
William Berger, the affable head of the Berger funds group in Denver, likes to talk.
He’ll tell you about his children (he’s got four), his diet (he’s still on it) and his school days (he was at Yale when George Bush was). Berger also likes to discuss his job as a portfolio manager and, especially, his favorite stocks, which include Wal-Mart Stores, Telefonos de Mexico and Synergen.
Berger certainly isn’t alone. Many mutual fund managers routinely discuss their favorite companies in articles or interviews appearing in the financial press. Many journalists like the topic too, because a story that includes a sexy stock or two often makes for more interesting reading. Even the Securities and Exchange Commission plays a part by requiring each fund to divulge its holdings at least twice a year.
But should you, as a mutual fund investor, spend a lot of time scrutinizing the stocks a manager holds? And should you second-guess a manager on the basis of what he owns? To both questions the answer is: probably not. “That’s why many people pick a mutual fund--because they don’t have the ability to analyze and buy stocks on their own,” says Dave Dievler, chief administrative officer at Alliance Capital Management in New York.
The biggest danger in evaluating a fund’s holdings in a shareholder report is that the list may already be out of date. The SEC requires fund companies to reveal the information in their annual and semiannual reports, but by the time the documents get written, printed and mailed, four to eight weeks may have elapsed.
Unless you compare a fund’s holdings to a prior period, you won’t know if the manager is accumulating or selling off shares in a company. “For obvious reasons, portfolio managers typically don’t like to talk about what they’re currently buying or selling,” says Eric M. Kobren, publisher of Fidelity Insight newsletter in Wellesley Hills, Mass.
Besides, factors other than portfolio holdings are probably more indicative of future success or failure. “As an investor, I’d be interested in what the fund holds, but it’s more important that the manager is still around and that you have faith in him,” says Roger Engemann, who runs the Pasadena Growth Fund. Investment approach, fund size and expenses are also telltale indicators, and you will want to check past results, in both good markets and bad.
On the other hand, the top holdings can help you determine whether the fund is staying true to form. Look for anomalies that might suggest that the manager is buying inappropriate stocks, advises Kobren. For example, if you own a conservative growth-and-income fund, you should expect to see a significant number of Mercks, Philip Morrises and IBMs. Yet these blue chips would be out of place in a small-company portfolio.
The prospectus lists a fund’s objective and approach, but usually these descriptions are imprecise. And even when a fund is staying on course, you can often gain better insight by finding out which stocks are held.
For example, the Berger 100 Fund, which rose 62% the first nine months of this year, is classified as a general growth portfolio. Yet it has a hefty 15% stake in Mexican stocks--a high exposure for a small foreign market and one that adds another layer of risk. Or consider the conservative Lindner Dividend Fund of St. Louis. It had a 35% weighting in utility companies at last count, making it practically a sector fund in disguise.
There’s nothing wrong with concentrating a portfolio in one area or another--provided shareholders keep an eye on what’s happening. “I think it’s important to know what the portfolio manager is doing . . . especially when the prospectus gives him wide latitude,” says Kobren. He cautions that many aggressive-growth funds have taken large positions lately in high-flying, and volatile, biotechnology companies.
It’s worth noting that certain funds aren’t trying to be widely diversified. This obviously applies to industry-specific sector funds, as well as a few others in more general categories. For several years, the tiny Sherman Dean Fund of San Antonio, Tex., has had more than one-third of its assets in a single company: Benguet, a Philippine mining operation. This helps explain Sherman Dean’s high volatility, evidenced by a gain of 47% in 1989 and a loss of 44% the following year.
The great majority of mutual funds are prohibited, by their own guidelines, from placing more than 5% of their assets in a single company. The SEC terms those that exceed the limit “nondiversified.”.
Because a list of holdings in an annual or semiannual report might be a bit stale, you can often obtain fresher information by calling the fund company. Some firms might just refer you to the most recent shareholder report, but others will provide more up-to-date data on the stocks owned. You should keep your eyes open for media interviews of the fund manager, since these will tend to be fairly timely.
Don’t try to predict where each stock in a mutual fund is headed; instead, regard the portfolio holdings as a way to make sure the manager is staying on course. “The key is to offer an investment philosophy that’s understandable to people,” says Berger. A list of top holdings can vividly illustrate a given approach.
Holding Patterns
You can often reach a better understanding of a mutual fund by examining the stocks held. Fund companies are required to divulge this information at least twice a year, and you can gain further insight by comparing current results to prior data. Here’s what to look for:
Diversification. Most funds won’t bet more than 5% on a single company, but a few take much higher stakes. In general, the less diversification, the more volatility a fund has.
Recognizable names. If you spot a lot of familiar companies in the portfolio, the manager is probably focusing on blue chip, dividend-paying stocks. For more aggressive growth, go with funds holding more obscure issues.
