Twentieth Century Funds Struggle as 21st Approaches

Marcus Singleton put $2,500 in Twentieth Century Giftrust for each of four grandchildren a few years ago. But for his fifth grandchild, now 3 months old, he plans to invest in another mutual fund, possibly the SteinRoe Young Investor fund.

“In the beginning, I remember thinking what a wonderful fund Giftrust was,” said Singleton, a retired aerospace engineer who lives in Pacific Palisades. “But now I think I’m going to change horses.”

You can’t blame him.

After a stunning performance in the early 1990s, when it became one of the hottest mutual funds around, Giftrust has slumped badly over the last two years. It took a 3% loss in 1997, when the average stock fund rose 24%.

Giftrust’s troubles have been symptomatic of broad performance woes within the Twentieth Century subfamily of American Century Investments of Kansas City, Mo.

Giftrust and siblings Twentieth Century Growth, Select and Ultra once formed a Murderers Row of mutual funds--the investment world’s equivalent of the 1927 New York Yankees. As recently as 1990, Growth and Select had the second- and third-best 15-year records in the fund business, trailing only Fidelity Magellan. And Ultra’s 86% gain in 1991 knocked the stuffing out of the competition that year, transforming it overnight into one of the largest mutual funds.

But in recent years, and especially since the bull market shifted into high gear in 1995, Twentieth Century’s core appreciation funds have struggled. Yet these funds should have been well-positioned for the rally, given their focus on staying invested in high-octane stocks.

The gravity of the situation hasn’t been lost on top executives at American Century, which counted $60 billion in assets as of Dec. 31.

“We didn’t do as good a job as we should have--that’s obvious,” said Robert Puff, American Century’s chief investment officer. Shareholders will see better returns this year, he vows.

What went wrong?

Puff blames growing pains. In 1995 Twentieth Century bought the Benham Group, a fund family based in Mountain View, Calif., to form American Century. It also began several conservative stock funds earlier in the decade that have fared very well.

Also, the company invested a lot of time, money and energy to upgrade record-keeping, shareholder service and other “back-office” operations. American Century correctly saw 401(k) retirement plans as a growing source of business for mutual funds and recognized that it needed to automate to grab its share of the pie.

But amid these distractions, Twentieth Century’s portfolio managers have had trouble handling the influx of dollars flowing their way--both from new 401(k) participants and traditional investors mesmerized by the track records of mutual funds. Ultra alone ballooned from less than $1 billion in assets in 1991 to $22 billion today.

“The company has grown a lot, and we haven’t done as good a job as we should in building the staff,” Puff said.

Yet that raises the question of why the company didn’t close the doors to some of its flagship funds when their sizes were more manageable. Rapid asset growth is often a cause in lagging performance, especially in regard to small-stock funds, because managers have trouble investing in tiny companies without pushing their prices around.

A case in point is Ultra, which built its record on promising small companies but which has been forced to focus on larger stocks.

James Stowers, Twentieth Century’s chairman and founder, has clung to the philosophy that investors who don’t like large-asset funds are free to transfer their money elsewhere.

But that’s a shareholder-unfriendly attitude in general, and it’s indefensible in the case of Giftrust because American Century requires investors in this unusual fund to stay put for at least 10 years.

Giftrust achieved its greatest success when it counted under $500 million in assets. Last year, with more than $900 million, it slumped to the bottom 2% of all small-stock funds tracked by Lipper Analytical Services of Summit, N.J.

American Century hasn’t closed any of its funds. But mindful of the potential problems caused by rapid cash inflows, the company vows to turn away new shareholders in its aggressive New Opportunities Fund when assets reach $400 million and in its International Discovery Fund when that fund nears the $1-billion mark.

Do investors in Giftrust and other Twentieth Century funds dare hope for better returns in the future? Yes, says Puff, urging further patience from shareholders. “We’re shining light on the areas” of poor performance, he said.

Specifically, he reports that the company has beefed up its stock-picking prowess with the addition of several managers and analysts.

Also important, the funds will be required to diversify across a broader array of industries than before. For example, “some of our small-cap funds were hurt in 1997 because they had little or no exposure to the banking industry,” Puff said.

Closer controls on trading also should help, Puff said, along with a new partnership with J.P. Morgan, a Wall Street giant that has expertise in global stock markets.

The Twentieth Century funds will stick to the team-management approach responsible for their great records of the past, yet each team will be responsible for fewer funds. Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y., sees this approach as one of the company’s strengths.

“If you want to maintain good performance with multibillion-dollar funds, you need teams,” he said. “Eventually, individual portfolio managers [the norm at other firms] will become anachronisms.”

Jacobs favors American Century’s Income & Growth, Equity Growth, Value and International Growth portfolios, but none of the firm’s old flagship funds.

The team approach tends to promote performance consistency, although that hasn’t held true with certain Twentieth Century funds recently. It’s hard to tell whether the reforms will succeed, but it’s encouraging at least that American Century recognizes there are problems and is taking steps to fix them.

“History would show that this has been a strong, high-performance organization,” Puff said. “I’m very confident that we’ve turned the corner in a lot of different areas.”

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Russ Wiles is a mutual fund columnist for The Times and coauthor of “How Mutual Funds Work” (Simon & Schuster). He can be reached at russ.wiles@pni.com