Despite Volatility, Stock Mutual Funds Post Average ’97 Gain of 24.4%
If 1997 was supposed to be a rough year for stock mutual fund investors, they should pray for many more of the same.
Despite wild market swings all year and a mini-crash on Oct. 27, the average general U.S. stock fund posted a total return of 24.4% in 1997, according to preliminary data from fund tracker Lipper Analytical Services in New York.
That was well above the 19.5% average fund return of 1996 but below the hot year of 1995, when the average gain was 31%.
Unfortunately for most investors, the average fund badly trailed the return of the Standard & Poor’s 500 index--the major market benchmark--for the fourth consecutive year.
Funds that passively mimic the S&P; shot up an average of 32.6% in 1997, according to Lipper. That was a full 8.2 percentage points above the average general fund’s return.
Then again, trailing the S&P; for long periods is nothing new for most actively managed funds. The S&P; beat the average fund every year from 1983 through 1990, for example.
What’s amazing to many Wall Streeters is that, after so many years of better gains from simply buying and holding the market as represented by the S&P;, the amount of money in S&P; mutual funds still is just $107 billion--a mere 7% of the total $1.59 trillion that investors have in U.S. general equity funds overall.
What that suggests is that, for many investors, hope springs eternal that their stock mutual funds will be among the handful that will manage to beat the market.
Yet only one fund category did beat the S&P; in 1997: Financial services industry funds soared 45.8% on average, despite a tumble early in the year when the Federal Reserve Board raised short-term interest rates a notch.
The big gains in the funds demonstrated that the long-term bull market in bank, brokerage and other financial stocks simply couldn’t be halted for long last year. And with consolidation still occurring at a fast pace in the financial services business worldwide, analysts say these funds may remain among the market’s leaders this year.
For much of the rest of the stock fund universe, 1997 saw decent, if sub-S&P;, returns:
* Micro-cap stock funds, which focus on the smallest of stocks, gained 30% on average.
* Small-stock funds rose 20.4% on average.
* Growth and income funds, the largest single fund category, rose 27.3% on average.
Bringing up the rear, Pacific-region funds were, of course, a disaster as Asian markets melted.
And while European stock markets zoomed, returns to U.S. investors were hurt by the strong dollar. The average European fund gained 15.4% for the year.
Latin American stock funds fared better, with a 25.6% average gain.
Overall, the boom in mutual funds rolled on in 1997, barely slowed by financial quakes in Asia and stormy spells in the U.S. stock market.
Fund investors kept stoking the fire with fresh supplies of money.
Even international stock funds seemed to retain an enthusiastic following among investors, despite the declines that rocked many markets in the Asia-Pacific region in the latter stages of the year.
Along the way, assets of all types of funds, as tracked by the Investment Company Institute, broke the $4-trillion mark for the first time. At the end of October, according to the most recent figures available, they stood at $4.33 trillion, up from $3.39 trillion 12 months earlier.
Net new cash flow into stock funds came to $195.06 billion through the first 10 months of 1997, running ahead of the $192.69 billion recorded by the ICI for the comparable period of 1996.
At the same time, net new cash flow into bond funds, which had been very sluggish over the previous three years, perked up a bit. The ICI said new sales minus redemptions and net exchanges for bond funds totaled $28.06 billion through Oct. 31, against just $8.86 billion in the like period a year earlier.
Of course, it helped that Wall Street continued to enjoy a mighty bull market, fueled by strong economic growth, low inflation and a decline in interest rates.
“We are living through an era of absolutely unprecedented prosperity in the United States,” observed Paul Boltz, chief economist at T. Rowe Price Associates in Baltimore, which manages a $79-billion fund family.
As recently as the end of 1993, fund industry assets were divided almost evenly among the three basic asset classes--stock funds, bond funds and money funds. Four years later, stock funds’ share of the industry had swelled to well over 50%.
Money funds reached a milestone of their own during the year, surpassing $1 trillion in assets for the first time.
With successes like that, the fund industry is now more than four times as big as it was just seven years ago. As T. Rowe Price Associates noted in a December meeting with the financial media, this onetime specialty business now accounts for 25% of U.S. household financial assets, and generates more than $20 billion a year in management fees.
More than a third of all the money invested in funds is held in tax-favored retirement accounts, a long-term vehicle that presumably encourages fund owners to invest regularly and patiently, and not to panic in periods of market volatility.
Delighted as they may be by all this, fund officials and analysts look ahead with considerable wariness to 1998.
“The average fund is up 347% since late 1987,” said Norman Fosback, editor in chief of the newsletter Mutual Fund Forecaster in Deerfield Beach, Fla. “That’s a stunning 16% annual rate of return, far above the market’s 10% historical norm.
“Would that the next 10 years be as generous to mutual fund investors,” he said. “Somehow we doubt it.”
The skeptics have a credibility problem to contend with, however. Similar warnings were issued at the start of 1997 and, indeed, at the start of 1996, but stock prices kept climbing anyway.
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Average Returns in Fund Categories
Performance of major mutual fund categories followed by Lipper Analytical in 1997. Figures for periods longer than a year are annualized average returns. Actual returns varied from year to year.
General Equity Funds
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Net assets, Number 4th Annu in millions of funds Type of fund qtr. 1-yr 2-yr $106,866.1 85 S&P; 500 index objective 2.74% 32.61% 27.43% 4,599.3 43 Micro-cap -6.67 29.99 24.48 130,307.6 208 Equity income 2.42 27.69 23.60 497,742.3 710 Growth and income 0.81 27.25 24.36 541,165.5 947 Growth -1.17 25.30 22.52 129,080.7 566 Small-cap -5.15 20.40 20.12 80,061.6 284 Mid-cap -3.32 20.10 19.34 97,609.7 248 Capital appreciation -3.71 20.00 17.43 1,587,432.8 3,091 Genl equity fund avg. -1.58 24.36 22.09
Net assets,alized returns in millions 3-yr 5-yr 10-yr $106,866.1 30.49% 19.74% 17.29% 4,599.3 26.27 15.45 14.78 130,307.6 25.67 17.21 15.02 497,742.3 26.65 17.66 15.88 541,165.5 25.34 16.78 16.40 129,080.7 23.02 16.75 17.28 80,061.6 22.93 15.70 16.68 97,609.7 22.26 15.74 15.35 1,587,432.8 25.03 16.96 16.18
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Sector and World Equity Funds
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Net assets, Number 4th Annualized r in millions of funds Type of fund qtr. 1-yr 2-yr 3-yr $16,833.4 38 Financial services 7.26% 45.76% 37.20% 38.90% 21,286.7 107 Utilities 10.68 25.83 17.35 20.50 4,211.1 38 Latin America -12.15 25.59 26.38 9.71 12,222.9 75 Real estate 0.61 22.39 26.52 22.55 12,631.6 41 Health & biotechn. -2.82 21.56 17.08 25.39 12,633.8 81 Europe -2.53 15.40 19.16 18.42 93,328.1 212 Global -4.89 13.27 14.94 15.37 22,274.8 67 Science & Techn. -14.03 9.66 13.12 20.99 150,231.8 491 International -7.64 5.62 8.52 8.77 7,209.9 58 Natural resources -14.96 0.70 15.40 16.89 19,645.4 151 Emerging markets -16.97 -2.16 3.24 0.91 1,562.0 33 Japan -16.44 -16.94 -13.51 -9.67 -0.05 4,864.7 49 Pacific -23.41 -27.72 -13.02 -8.36 2,500.0 45 Gold -30.27 -41.73 -21.22 -13.66 0.28
Net assets,eturns in millions 5-yr 10-yr $16,833.4 25.75% 23.61% 21,286.7 13.34 13.92 4,211.1 11.47 N/A 12,222.9 13.22 12.30 12,631.6 16.82 21.32 12,633.8 17.76 10.28 93,328.1 14.14 12.02 22,274.8 20.76 19.58 150,231.8 12.28 9.82 7,209.9 14.87 10.94 19,645.4 7.05 N/A 1,562.0 1.06 4,864.7 3.26 5.38 2,500.0 -2.96
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* N/A: Not applicable
Source: Lipper Analytical
