For Stock Funds, Lessons in the Winners <i> and</i> Losers
The average stock mutual fund finished the second quarter with a 2.6% loss, the worst performance since a 15.5% drop in the bear market third quarter of 1990.
Considering Wall Street’s general malaise this spring, however, the funds’ small average loss is more likely to engender relief than grief among most shareholders. They know that it could’ve been worse.
“It wasn’t that bad a quarter,” said Michael Lipper of fund-tracker Lipper Analytical Services, which reported midyear fund results on Thursday.
Heavy losses among small-stock funds dragged down the industry’s returns, which contrasted with a 1.9% total return on the Standard & Poor’s index of 500 blue chip stocks in the quarter.
There were fund winners, but picking them was tough. Among 1,318 stock funds, the few stars were funds that focus on bank and savings and loan stocks, gold and silver, and foreign stocks--especially Hong Kong issues, which are in the midst of a wild bull market.
Yet many fund investors may be much more intrigued with the midyear losers’ list: The 10% to 20% declines suffered by many classic growth-stock and small-company funds during the quarter could mean bargain prices for long-term investors.
Indeed, growth-fund managers argue that their favorite stocks--in such fields as health care, retailing and technology--have already suffered the losses that may await the stock market as a whole, if the latest dismal economic news foreshadows recession.
“I think the second half could be an unraveling of what we had in the first half of the year,” says Jeffrey Malet, manager of the Pacific Horizon Aggressive Growth fund in La Jolla.
His fund plunged 14.7% during the quarter and 20.3% for the half, hurt by deep losses in such stocks as mail-order prescription company Diagnostek and athletic shoe maker Reebok. But Malet believes that investors will return to his consumer stocks in the second half while dumping the industrial issues that had run up on hopes of a strong economic recovery.
Tom Maguire, manager of the Safeco Growth fund in Seattle, also insists that “the second half has got to be better than the last quarter” for growth stocks. His fund lost 15.6% in the quarter, but Maguire says the result of growth stocks’ selloff is that “there are so many cheap stocks in this group now.”
Stephen Lewis, whose Kemper Growth fund in Chicago has big stakes in growth issues such as Philip Morris, Microsoft and drug firm Abbott Laboratories, says the average stock in his fund boasts an annual earnings growth rate of 18.5%. Yet the fall in the stocks during the half has left the portfolio trading at 14 times estimated 1992 earnings per share, he says.
With that kind of discount to growth, Lewis says, “we’re not going to change our stripes now,” despite fears that growth stocks might have further to fall.
If nothing else, the growth funds can point out that buying the fund winners of the previous six months has frequently been a mistake; it’s often smarter to buy the losers.
In January, for example, many investors poured money into health care/biotechnology stock funds, after they had soared an average 74.3% in 1991. But January turned out to be the biotech peak: The average fund in that group plummeted 16.3% in the first half, worst of any category other than Japanese funds.
Despite experts’ general advice to be suspicious of recent winners, the best fund category of the first half may well continue to fly in the second half: financial-services stock funds.
Those funds, mostly invested in banks and S&Ls;, rose 60.6% last year on average, 6.3% in the first quarter and 6.4% in the second quarter. Bank and S&L; stocks returned to favor last year as loan losses tapered off and as falling interest rates boosted profits.
Now, with the Federal Reserve’s latest cut in rates, profits at many banks and S&Ls; are almost certain to remain healthy through 1992. Reason: Banks quickly cut deposit rates, while loan rates fall slowly.
More important, many bank and S&L; stocks still sell for less than 10 times annual earnings per share. “There are still quite a few that offer very good value,” says David Ellison, head of Fidelity Select Savings & Loan fund in Boston.
His fund, loaded with many relatively small S&Ls; in the Midwest and South, jumped 12.4% for the quarter. Ellison expects an added benefit from increasing merger activity among healthy institutions.
Likewise, the Freedom Regional Bank fund in Boston is focused mostly on smaller, healthy banks that are still being rediscovered by Wall Street, says manager James Schmidt. He believes that his fund is capable of a further 15% to 20% gain over the next 12 months.
What about foreign stock funds? They beat U.S. funds in the quarter for the first time in three years, Lipper says. Much of the gains came from the dollar’s decline. The DFA Group United Kingdom Small-Company fund, for example, posted a 15.9% return, of which 10 percentage points was dollar-related.
In the second half, foreign funds could continue to gain both from a weak dollar and falling interest rates overseas, some experts say.
Stock Fund Performance by Category
Here are average total returns for 18 categories of stock mutual funds in the second quarter, first half and past 12 months. Total returns are price changes plus any dividends earned.
Category (No. of funds) 2nd Qtr. Yr. to date Financial services(12 ) +6.38% +13.06% European region (28 ) +6.13 +4.35 Pacific region (20 ) +5.87 +2.63 Utilities (31 ) +4.98 +1.37 International: foreign stocks only (96 ) +4.32 +1.09 Gold (34 ) +3.97 -3.07 Natural resources (21 ) +3.38 +0.17 Equity income (72 ) +2.17 +1.82 Global: U.S. and foreign stocks (60 ) +1.57 -0.28 Growth and income (265 ) +0.04 -0.34 Real estate (6 ) -0.61 +1.19 Specialty/misc. (28 ) -0.80 +1.92 Growth (316 ) -2.96 -4.09 Capital appreciation (135 ) -4.07 -3.70 Science & technology (21) -7.02 -6.89 Health/biotechnology (12 ) -7.82 -16.33 Small company growth (131) -8.37 -6.05 Latin American region (68) -12.41 +2.72 General stock fund average -2.59 -2.71 S&P; 500 index, including dividends +1.90 -0.67
Category (No. of funds) 12 months Financial services(12 ) +39.56% European region (28 ) +15.01 Pacific region (20 ) +4.13 Utilities (31 ) +17.51 International: foreign stocks only (96 ) +9.74 Gold (34 ) -7.39 Natural resources (21 ) +0.74 Equity income (72 ) +14.65 Global: U.S. and foreign stocks (60 ) +11.29 Growth and income (265 ) +12.86 Real estate (6 ) +10.60 Specialty/misc. (28 ) +14.74 Growth (316 ) +12.02 Capital appreciation (135 ) +13.67 Science & technology (21) +15.84 Health/biotechnology (12 ) +12.41 Small company growth (131) +14.05 Latin American region (68) N/A General stock fund average +13.00 S&P; 500 index, including dividends +13.39
Source: Lipper Analytical Services Inc.
Top Funds, 2nd Quarter Fund : Return
Equi-Wright Hong Kong : +19.60%
DFA Group UK Small Co.: +15.88%
Morgan Stanley Int. Asian: +15.43%
World Newport Tiger : +12.90%
Equi-Wright UK : +12.49%
Fidelity Select S & L : +12.36%
GAM International : +11.67%
Fidelity Sel. Regnl. Banks : +11.44%
Rushmore Prec. Metals : +11.18%
Capstone European : +11.04%
Average stock fund : -2.59%
Source: Lipper Analytical Services
Worst Funds, 2nd Quarter Fund : Return
Schield Value : -31.45%
Schield Aggress. Growth : -22.53%
Prudent Speculator Lvrg.: -20.84%
Steadman Oceanographic : -20.55%
Oberweis Emerging Grow.: -20.39%
Transam. Cap. Appreciat.: -19.22%
Lexington Strat. Investmnt: -17.65%
Oppenheim. Glbl. Bio-tech: -17.40%
Rbt. Steph. Emerg. Grow.: -17.25%
Shearson Small Capital. : -16.28%
Average stock fund : -2.59%
Source: Lipper Analytical Services
Top Funds, 1st Half Fund : Return
Equi-Wright Hong Kong : +34.74%
Fidelity Select Auto: +31.69%
Fidelity Select S&L; : +29.27%
Morgan Stanley Int. Asian: +26.23%
Fidelity Sel. Regnl. Banks: +26.19%
Sherman, Dean Fund : +24.63%
Freedom Regional Bank: +22.69%
Fidelity Select Financial : +21.86%
World Newport Tiger: +20.22%
Harris Assoc. Oakmark : +16.97%
Average stock fund : -2.71%
Source: Lipper Analytical Services
Worst Funds,1st Half Fund : Return
Lexington Strat. Invest.: -35.71%
Schield Value : -31.68%
Oppenheim. Glbl. Bio-tech: -28.58%
Capstone Nikko Japan : -26.13%
DFA Group Japan Small: -24.18%
USAA Mut. Aggress. Grwth: -23.38%
Vanguard Eq. Ind. Pacific : -22.82%
Dean Witter Devel. Grwth : -21.33%
Hartwell Emerging Growth : -20.99%
Financial Health Portfolio : -20.83%
Average stock fund : -2.71%
Source: Lipper Analytical Services
Biggest Funds, 1st Half Fund : Return
Vanguard Windsor : +10.06%
Fidelity Puritan : +7.18%
Fidelity Equity-Inc : +5.93%
Washington Mut. Investors: +2.23%
American Mutual : +1.99%
Pioneer II : +1.91%
Fidelity Magellan : -0.05%
Investment Co. of America : -0.22%
Vanguard Index 500 Port. : -0.75%
Twentieth Century Select : -10.28%
Average stock fund : -2.71%
Source: Lipper Analytical Services
