MARKET BEAT / TOM PETRUNO : A Stock Fund Investor’s Wake-Up Call for the ‘90s
The average U.S. stock mutual fund rose 4.6% in the first half of 1993, which--though not a great return--was better than a lot of the alternatives.
But as millions of stock fund investors tally their portfolio results at midyear, many will quickly realize that they don’t own the average fund. By definition, half of all 1,158 general stock funds were below-average performers in the first half.
If this were still the hot market of the 1980s, when stocks routinely rose 17% a year, even poorly run stock funds could at least stay solidly in the black.
An average gain of just 4.6% so far in 1993, however, means that many laggard funds had zero returns or actually lost money. For investors in those funds, the paltry 1.3% first-half interest paid by the typical money market fund would have constituted a better return.
Similarly, the average general stock fund’s 8.9% gain in 1992 meant that about one-third of the funds earned mid- to low-single-digit returns or worse.
For fund investors, 18 months of mostly dwindling returns should serve as a wake-up call: Stock market returns overall are coming down from the generous gains of the ‘80s, and that means there’s less margin for error by fund managers. If you’re in the wrong funds, it’s going to hurt.
But you can improve your chances of earning above-average stock fund returns, experts say. Here, as part of a midyear review of fund results, are three strategies worth considering.
* Don’t rely on a single fund, or a single concept. Owning just one or two stock funds may be unavoidable for new investors with small savings. But as your nest egg builds, most investment pros advise diversifying into at least a handful of funds.
“Somebody who owns one fund is at risk. I don’t care if it’s the best fund in the world,” says fund-tracker Michael Lipper of Lipper Analytical Services in Summit, N.J.
At a minimum, you should own at least one blue-chip stock fund (often categorized as “growth and income” funds), one small-company stock fund and one foreign-stock fund, many pros say.
To branch out further, you might add a heavily value-oriented stock fund (typically called “equity-income” funds because the stocks they own often are large-company, lower-risk, high-dividend paying issues) and a heavily growth-oriented fund, which would target fast-growing companies.
If you need convincing about the merits of fund diversification, take a close look at first-half ’93 returns by fund category. Equity-income funds’ average return of 7.55% was more than double the average growth-fund return of 3.08%, according to Lipper Analytical.
Why the disparity? Because equity-income funds own many of the industrial stocks that now are Wall Street favorites. Growth funds, by contrast, often favor consumer stocks, many of which have been hurt by Americans’ tight-wad spending habits of late.
When will those trends reverse? Who knows? You could try to predict them, but the easier route is to simply invest in both fund types.
* Evaluate your funds regularly. Sure, you said you were buying that fund to hold it for 20 years. But don’t close your eyes.
Compare your fund’s performance to the average fund in its category every six months. (Ask your fund manager how Lipper groups it, if you aren’t sure.)
Also compare your fund to a market benchmark, such as the Standard & Poor’s 500-stock index.
What if your fund is lagging the averages? The first question to answer is whether the problem is your manager--or a market-sector problem.
“A lot of the time, a fund trails because its particular style of investing is out of favor, not because the manager is a bum,” says John Rekenthaler, editor of Morningstar Mutual Funds, a Chicago-based fund tracker.
If you specifically chose to own a growth-stock fund, for example, you can’t fault the manager for failing to own value-type stocks.
Still, if your fund has been a dud for the last 18 months, it’s time to start worrying, Rekenthaler says. Does the manager own out-of-favor stocks, or has he or she simply been bouncing around the market, unable to latch onto profitable stock themes? Does the manager pay lip service to long-term investing, yet trade in and out of stocks wildly--and badly?
Ultimately, Rekenthaler says: “You have to (judge) the investing style of the fund with how well the manager has implemented it.” If the implementation has been sub-par for 18 months or longer, consider investing elsewhere, he says.
Michael Lipper, however, says every fund deserves at least one full cycle--a bull market and a bear market--to prove itself. A typical cycle takes four years, he notes. “Most of us took four years to graduate high school and another four to graduate college,” he notes, by way of analogy.
* Invest with great stock pickers. This sounds obvious. Yet how many really great stock pickers can there be, among the 1,648 (and growing) stock funds? Think of it this way: How many .300 hitters are there in pro baseball?
The explosion of stock fund sales since 1990 means many young, unproven managers have been put in charge of tens of billions of dollars. With the stock market now at record heights and the economy still struggling, we’re finding out which managers truly have sharp eyes for bargains and for timing major market shifts.
If you’re looking for a single trait that might distinguish good managers from bad in the ‘90s, start with conviction, some pros say. You should see conviction in the way the manager directs the fund, buys stocks and explains his or her philosophy in the annual and midyear reports to shareholders.
Scott Schoelzel, lead manager of the Founders Growth fund in Denver, didn’t have a great 1992, when the fund gained 4.3%. But so far this year, it’s up more than 12%.
“This is very much a stock picker’s market,” Schoelzel says. Thus, where managers go wrong is in their tendency to own stocks in a wide range of industries when they can’t decide which look best, he says. That suggests a lack of conviction, and it may be a formula for mediocrity or worse in the ‘90s.
“I’m willing to be out of certain market sectors,” Schoelzel says. “A lot of managers aren’t willing to do that.”
For example, he says, he hasn’t owned energy stocks this year, because he didn’t believe in their growth potential. While energy stocks have performed well, Schoelzel’s heavy commitment to other hot sectors--among them, computer-networking stocks and financial issues--more than compensated for missing energy.
Charles Albers, whose New York-based Guardian Park Avenue fund has been a stellar long-term performer, also is willing to load up on those stocks whose prospects he likes and stay away from making marginal bets just for diversification’s sake.
Guardian now is nearly two-thirds invested in just three areas: energy, financial services and capital goods/technology. And Albers’ shareholders have again been well rewarded: The fund is up 13% this year after a 20% gain last year.
Of course, conviction also can backfire if a manager bets wrong.
Still, in a difficult stock market, the fund managers who are likely to perform best for their shareholders are those who know how to spot opportunity, and who have the guts to make substantial bets on those opportunities.
If you don’t sense those traits in your funds, why do they deserve your hard-earned money?
Stock Fund Performance, First-Half ’93
Here are average total returns for key categories of stock mutual funds in the first half of this year. Also shown are the average general stock fund’s return and the “market” average, as representd by the Standard & Poor’s 500 stock index. Returns measure price change plus any dividend.
* International: +14.56% Utilities: +10.74% Equity-Income: +7.55% Capital appreciation: +5.64% Growth and Income: +5.21% S&P; 500: +4.86% Small-company: +4.67% General stock fund average: +4.58% Growth: +3.08% Source: Lipper Analytical Services
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Stock Funds Take in More Money . . . Net new cash flow into stock funds, in billions of dollars 1991 1st quarter: 5.7 2nd quarter: 7.4 3rd quarter: 9.6 4th quarter: 15.7 1992 1st quarter: 20.6 2nd quarter: 18.7 3rd quarter: 14.5 4th quarter: 24.3 1993 1st quarter: 30.2 2nd quarter: 28.0* * Estimate
. . . But Their Gains Get Smaller Average total return, general U.S. stock funds, in percent change by quarter: 1991 1st quarter: 17.2 2nd quarter: -0.9 3rd quarter: 7.3 4th quarter: 8.3 1992 1st quarter: -0.2 2nd quarter: -2.6 3rd quarter: 2.8 4th quarter: 9.1 1993 1st quarter: 3.3 2nd quarter: 1.3 Sources: Investment Company Institute, Lipper Analytical Services
