More Mutual Fund Managers Give Up Trying to Time the Market

If you are relying on the managers of your stock mutual funds to protect you from the next bear market, you may be operating under a serious misunderstanding.

More and more stock fund managers lately have abandoned all efforts at timing the market, seeing it as pretty much a mission impossible.

Instead, they follow a philosophy of staying fully invested in stocks at all times, focusing all their energies on trying to pick winners among individual companies.

These managers leave decisions about asset allocation--how much money to keep in stocks, or bonds, or short-term money markets--to the shareholders. Indeed, many of the shareholders profess to like it that way.

But as this view has gained wider support, it has pushed aside what used to be regarded as a prime selling point of mutual funds: that professional management could do better than the casual individual investor at choosing the best times to move into and out of the market.

Some managers still attempt the difficult feat of timing the markets, by increasing or decreasing the percentage of the total assets in a fund that are committed to stocks.

Jeffrey Vinik, manager of the giant Fidelity Magellan Fund, made a notable move of that sort several months ago when he shifted more than a third of Magellan’s $56-billion portfolio out of stocks and into bonds and cash.

But when the stock market kept climbing, while bond prices sagged, Magellan’s performance fell behind other stock funds through the early months of 1996. Vinik, who seemed to become the designated lightning rod for all criticism or questions leveled at the Fidelity organization, last month left to set up his own money management firm.

His experience seems sure to reinforce the perception among his peers that market timing is a dangerous, if not foolhardy, pursuit.

“Professional money managers are pressed to remain fully invested by their mutual fund investor and plan-sponsor clients,” says David Shulman, investment strategist at Salomon Bros. Inc. “To them, the object lesson of Jeffrey Vinik’s resignation from Fidelity is that it is difficult to hold cash in a rising market. As a result, at market tops, most investors are out of cash.”

Indeed, all through the steady rise of the stock market over the last 5 1/2 years, fully invested funds have achieved the best results. Vinik is by no means the first manager whose turn to caution led to the loss of a job.

But when and if the market climate changes, the results might start to look different. In a flat or declining stock market, investors, their advisors and the media would be quick to notice that funds with significant cash or bond reserves were holding up better than the fully invested ones.

Fully invested managers would argue, as they do now, that long-term investors should pay little attention to all market fluctuations, focusing instead on staying the course.

But that message, for all its sensibility, might not play quite as persuasively as it has in the near-ideal climate that has prevailed lately.

Where does a typical long-term, buy-and-hold stock fund investor stand in all this?

If you are pursuing long-term growth with a buy-and-hold strategy, a fund that stays fully invested at all times might suit you just fine. If you are an activist who wants to try to time the market, a fully invested stock fund also might be precisely what you want.

Given the ease of moving your money around among a variety of stock, bond and money funds, you can do your own asset allocation. Once you have set yourself on this course, you want to stick with fully invested stock funds, so that they don’t make asset-allocation moves that conflict with your own.

But if you want a fund manager to try to time the market for you, a fully invested stock fund won’t fill the bill.

Instead, you will need to do some research to find managers who have some credentials in the difficult business of timing the market, as well as a clearly stated readiness and willingness to try.