Quality vs. Quantity at Twentieth Century
Anyone visiting the headquarters of Twentieth Century Mutual Funds in recent weeks would have noticed a lot of chocolate lying around the office--not just any chocolate but “Fifty Billion Celebration Bars.”
The candy bars were passed out among Twentieth Century’s staff to commemorate the company’s breach of the $50-billion asset level in June. That’s up from $15 billion just five years ago and $1 billion in 1983.
Twentieth Century has expanded aggressively in recent years and now ranks as the No. 4 no-load fund family, trailing only Fidelity Investments, Vanguard Group and T. Rowe Price Associates.
It has invested heavily in state-of-the-art technology to better serve shareholders. It has broadened its lineup of stock mutual funds. It has made a big push into the 401(k) retirement area. It recently unveiled special classes of its no-load funds that brokers can sell with higher fees attached.
And most important, it has become a major purveyor of bond funds by virtue of its purchase of Benham Group one year ago.
Still, it’s hard to shake the feeling that the company might have sacrificed some quality for quantity.
Twentieth Century, which will soon change its name to reflect the Benham merger and the coming 21st century, still has a superstar in Giftrust. This unusual fund, which can only be used as a gift, ranks as one of the best performers of the last decade.
Twentieth Century’s Vista fund has been rejuvenated with the small-stock rally in recent years. And the company has achieved good results from two new value portfolios that provide a contrast to its traditional growth-oriented investment style.
But Twentieth Century’s three largest funds, which collectively hold half the company’s assets, have been sliding toward mediocrity.
A few years ago, Twentieth Century had the best one-two punch in the mutual-fund business with its Growth and Select portfolios. Only Fidelity Magellan had a better record.
But following a 69% surge in 1991, Growth has trailed the Standard & Poor’s 500 index in each of the past four years--it underperformed by 17 percentage points in 1995.
Select has lagged the S&P; 500 in three of the last four years.
And Twentieth Century Ultra, the group’s biggest portfolio, merely has been moving in line with other aggressive funds in the last four years. Since 1991, its assets surged from $3 billion to nearly $17 billion as investors chased a remarkable performance record marked by a tripling in value from 1988 through 1991.
The recent unremarkable results delivered by Growth, Select and Ultra are all the more surprising in that Twentieth Century manages its funds by committee--a system that should ensure consistency.
“I’m puzzled why it does not seem to be working in practice,” says Steve Matuszak of the Mutual Fund Inner Circle advisory service in Reno.
Two of Benham’s stock funds, the Equity Growth and Income & Growth portfolios, have even been performing better against their peer groups than have most of Twentieth Century’s products, Matuszak says.
After the merger is finalized in the next couple of months, the Benham stock funds will still be managed separately, at that firm’s office in Mountain View, Calif., as will the bond funds from both groups.
Twentieth Century’s main stock-picking approach rests on finding companies with business momentum. It does that by focusing on earnings, adjusting them for taxes and other factors, then using these massaged numbers to identify the underlying profit trend. Twentieth Century was one of the first to harness computer power to screen for attractive stocks, although its managers supplement this with their own research.
“We’re looking for companies with accelerating earnings,” says Glenn A. Fogle, a co-manager of Giftrust and other funds. “The computer obviously is very good at screening data.”
So what’s the problem with the company’s three big stock funds?
Robert C. Puff Jr., Twentieth Century’s chief investment officer, does not offer many specifics.
“We did not execute well as a staff,” he says. “Our goal is to get these funds back to performance levels that are consistent with their histories.”
The company will not deviate from the management-by-committee style that got it this far, Puff adds.
“Teams deliver more brain cells and more perspective, and they increase the likelihood that funds will stay focused,” he says.
Arguably, Twentieth Century is a better overall company than it was half a dozen or so years ago. Thanks to the Benham purchase, the combined firm offers a larger and more diverse batch of funds and has enough critical mass to ensure its viability as an industry leader for years to come.
All that’s missing is a return to glory for its flagship funds.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Twentieth Century at a Glance
* Founded: 1958
* Phone: (800) 345-2021 (Benham: [800] 331-8331)
* Number of funds: 65
* Assets: $50 billion
* Employees: 2,100
* Ownership: Privately held. The families of founders James E. Stowers Jr. and James M. Benham, along with key officers, own most shares.
* Ratings: Morningstar Inc. of Chicago gives a 3.2 cumulative rating to Twentieth Century’s funds, a slightly above-average mark, and a 3.0 cumulative score to the Benham funds. The results reflect risk-adjusted performance, where 5 is the top score and 1 the lowest. Value Line of New York, which uses a different rating system, scores Twentieth Century’s funds a bit lower than Morningstar and Benham’s a bit higher.
