Lowered Expectations : Stock Funds’ Yearly Gains May Be Returning to Normal
Most stock mutual funds produced high-single-digit returns in 1992, beating key market benchmarks but lagging the huge annual gains investors saw during most of the 1980s.
This year should bring more of the same single-digit numbers, experts say--though some also warn that history suggests the funds are vulnerable to a sharp drop.
The average general stock fund rose 8.88% in 1992 after surging 35.6% in 1991, according to a quarterly survey of 1,400 funds by Lipper Analytical Services in New York.
Last year’s entire net gain came in the fourth quarter as stocks rocketed with President-elect Bill Clinton’s victory. At the end of September, the typical fund had been up just 0.04%.
Rated against broad stock indexes, the funds performed well for a second year: The 8.88% average fund gain topped the 7.61% return on the Standard & Poor’s 500-index of blue chip stocks.
The funds tend to do better overall than blue chip benchmarks whenever small-company stocks are rising sharply--which has been the case since 1990. Even stock funds that mostly target blue chip issues often own some small stocks as well, so they have a performance edge over the S&P; 500 in prolonged small-stock rallies.
The hottest funds last year were those that specialize in stocks of specific industries, including banks and other financial stocks, technology stocks and real estate issues.
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The losers were mostly foreign stock funds, as foreign economies waned; those that target health care stocks, as fear of federal cost-controls swept the industry, and gold funds, as the metal’s price sank for a fourth straight year.
Michael Lipper, head of Lipper Analytical, noted that investors should be pleased with 8% to 9% returns, given that bank savings certificates, money funds and many other alternatives posted much lower returns.
But he added, “I’m very concerned about (the market’s) ability to take this through another 360 days” without a significant pullback in stock prices.
Indeed, since the mid-1970s the market--and stock funds--have followed a pattern of two good years followed by a lousy year.
Yet many fund managers argue that the market rarely nose-dives when the economy is just beginning to pick up steam after a recession.
“If the economy shows some good strength this year I think we can have a pretty good move in the market--at least for those stocks sensitive to the economy,” said Bill Dutton, manager of the Chicago-based Skyline Special Equities, the year’s seventh-best-performing fund (up 42.4%).
Nonetheless, Lipper advises stock investors to lower their expectations after the above-average returns of the ‘80s.
Over the past 15 years, the average stock fund rose 15.6% a year, but over the very long term, returns have been closer to 9% or 10% a year.
Some of the best-performing funds of 1992 are echoing Lipper’s warning about ’93 returns.
“We’re not expecting anywhere close to the results of the last two years,” said Stephen Binder, manager of the Fidelity Select Regional Banks fund in Boston. His fund jumped 48.5% last year after zooming 65.8% in 1991.
Bank stocks have been on a roll as the industry has returned to health after the real estate debacle of the late-’80s.
Also, a rash of bank failures and mergers since 1989 has left the remaining players in powerful market positions.
Binder believes that his stocks, including NationsBank in the Southeast and Comerica in the Midwest, will appreciate further as the economy grows, but he expects the gains to be more modest.
James Schmidt, manager of the John Hancock Freedom Regional Banks fund in Boston, believes that he can still realize 15% to 20% returns this year, after last year’s 47.4% rise.
Trading at only about 10 times earnings per share, on average, “Bank stocks are still cheap, and the benefits of the industry’s consolidation will continue,” he said.
Many experts also believe that the small-stock rally will continue in 1993. However, it will probably become more difficult for small-stock fund managers to beat the averages, as the rally narrows and stocks become more expensive relative to earnings.
Lipper notes that in 1991, every small-stock fund advanced in that year’s rally.
But last year, almost 10% of small-stock funds actually declined for the year, despite the still-broad rally in smaller issues.
As stock pickings get slimmer in general, some fund managers say the smartest move is to stay with so-called value stocks, which typically sell for low prices relative to earnings per share.
Robert Sanborn, manager of the Chicago-based Oakmark Fund (the year’s No. 2 fund), now has big bets on defense issues such as Lockheed and Martin Marietta, which he believes are undervalued stocks given their earnings power.
As for the rest of the market, Sanborn said the fourth-quarter runup has left many stocks too high-priced for his tastes.
“I’m just not finding the kind of bargains we like to see,” he said. “We try to be like Filene’s Basement shoppers when it comes to stocks.”
Stock Mutual Funds: A Good, Not Grea, Year
Mirroring the stock market overall, the average general stock mutual fund gained 8.88% last year, a decent return but far below the typical gains of the last 15 years.
Average fund returns since 1975: 1992: 8.88%
Stock Fund Performance by Category
Here are average total returns for 18 categories of stock mutual funds, measured over three periods: the fourth quarter, 1992 and the last five years. Total returns are price changes plus any dividends earned.
Category (No. of funds) 4th Qtr. 1992 5 years Financial services (14) +15.8% +35.2% +167.0% Science & technology (21) +17.7% +13.5% +115.6% Real estate (6) +8.0% +12.8% +80.0% Small company (151) +16.0% +12.5% +125.5% Specialty/misc. (27) +8.4% +11.5% +102.5% Equity income (74) +4.5% +9.5% +82.4% Utilities (37) +2.9% +9.2% +97.2% Growth and income (283) +5.9% +8.6% +92.8% Capital appreciation (135) +10.3% +8.3% +102.8% Growth (380) +9.1% +7.8% +103.2% Natural resources (22) -3.4% +2.0% +43.9% Pacific region (24) +1.9% +0.4% +36.4% Latin American region (3) +10.0% +0.4% NA Global: U.S. and foreign (57) +2.1% -0.3% +46.2% Intl: foreign only (106) -1.2% -5.1% +34.7% European region (28) -4.1% -8.0% +26.3% Health/biotechnology (15) +11.1% -8.3% +207.0% Gold (33) -9.2% -14.6% -29.4% General stock fund avg. +9.0% +8.9% +101.4% S&P; 500 index, with divs. +5.0% +7.6% +108.6%
Source: Lipper Analytical Services Inc. NA: Not applicable
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Top Funds, 4th Quarter Fund: Return
Capstone PBHG Growth: +42.3%
J. Hancock Special Equit.: +32.0%
Parkstone Small Cap: +31.4%
Adv. Inner Circle: Pin Oak: +29.7%
20th Century Giftrust: +28.8%
Seligman Commun. & Inform.: +27.4%
Main Street: Inc. & Growth: +27.1%
AIM Funds C: Aggr. Growth: +26.4%
Bull & Bear Special Eq.: +26.3%
Putnam New Opportunities: +26.1%
Average stock fund: +9.0%
Source: Lipper Analytical Services
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Worst Funds, 4th Quarter Fund: Return
Utd. Services: Gold Shares: -22.1%
Monitrend Gold: -19.3%
Lexington Strategic Inv.: -19.0%
Van Eck International: -13.5%
Dimensional: Continental: -13.4%
Equi-Wright: Dutch: -12.6%
Blanchard Precious Metals: -12.6%
Lexington Goldfund: -12.3%
Equity Strategies: -12.2%
Jermyn St.: Intl. Equity: -11.6%
Average stock fund: +9.0%
Source: Lipper Analytical Services
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Top Funds, ’92 Fund: Return
Fidelity Select S&L;: +57.8%
Oakmark: +48.9%
Fidelity Select Regl. Bank: +48.5%
J. Hancock Fr.: Regl. Bank B: +47.4%
Fidelity Select Financial: +42.8%
Heartland Value: +42.5%
Skyline Special Equities: +42.4%
Fidelity Select Auto: +41.6%
PaineWebber Regl. Finl. A: +38.7%
PaineWebber Regl. Finl. B: +37.8%
Average stock fund: +8.9%
Source: Lipper Analytical Services
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Worst Funds, ’92 Fund: Return
Lexington Strategic Inv.: -60.7%
Utd. Services: Gold Shares: -50.8%
Equi-Wright: Italian: -33.6%
Equi-Wright: Spanish: -33.0%
Monitrend Gold: -29.1%
Van Eck International: -29.1%
Capstone Nikko Japan: -28.9%
Jermyn St.: Intl. Equity: -26.6%
Dimensional: Japan Small: -26.1%
Progressive: Value: -25.4%
Average stock fund: +8.9%
Source: Lipper Analytical Services
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Biggest Funds, ’92 Fund: Return
(ranked by assets)
Fidelity Magellan: +7.0%
Investment Co. of America: +7.0%
Washington Mutual: +9.1%
Vanguard Windsor: +6.5%
Vanguard Index 500 Port.: +7.4%
Income Fund of America: +13.2%
Fidelity Puritan: +15.4%
Vanguard Wellington: +7.9%
AIM Equity Weingarten: -1.4%
Vanguard Windsor II: +12.0%
Average stock fund: +8.9%
Source: Lipper Analytical Services
Top Funds, 4th Quarter
