Giftrust Fund, Once a Small-Stock Leader, Struggles to Recover

Plenty is written about the best mutual funds to buy. But for many investors, the bigger issue is whether to stay in funds they already own--especially when a fund’s performance has turned wretched.

This new column, to appear periodically, will evaluate funds that have stumbled and will consider the hardest question most investors face: whether to stay or go.

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Incompetent, perhaps. Stupid, maybe.

But immoral?

You don’t often hear that word used to describe mutual fund managers--no matter how bad they are at picking stocks.

Yet that’s exactly how Pat Anderson describes the folks at American Century-Twentieth Century Giftrust. “I think the fund managers are both weak-minded and immoral,” said Anderson, a retiree who lives in Brentwood.

“Giftrust continually loses money,” she said. “They know that many of us are putting aside money for youngsters in this fund,” often for college savings.

How bad can the performance of this 15-year-old fund be to generate such animus from this grandmother of eight who gave shares of the fund to five of her school-age grandchildren?

The Fund: American Century-Twentieth Century Giftrust, based in Kansas City, Mo.

The Problem: For an aggressive stock fund that invests in smaller companies with strong earnings momentum, this fund has had absolutely no momentum on its side in recent years.

Over the last one, three and five years, Giftrust has finished in the bottom 10% of the small-stock growth fund category--which in turn has been among the worst-performing categories of U.S. stock funds over the last five years.

In other words, Giftrust is among the worst of the worst.

In 1998, when its average peer fund was up 5%, Giftrust fell more than 13%. In 1997 the fund managed to lose 1.2% when its peers gained 16.3%, on average.

The History: As recently as 1995, Giftrust was on fire. It was the best-performing stock fund over the previous 10 years.

It was on such a roll that one nationally syndicated columnist wrote of it: “Like basketball’s Michael Jordan, Giftrust seems to be playing a completely different sport from its competitors.”

That’s when Anderson and thousands of other investors began pouring money in.

“At the time, it sounded like an awfully good idea,” said Anderson. But, “the minute we got in, it started to plummet.”

And given the fund’s unique structure--money invested in the fund must stay there for at least 10 years, and sometimes longer (which is why so many parents have used it as a college savings vehicle)--Anderson can’t take her grandkids’ money out. Investors who’ve been in the fund for the required 10 years, however, do have the exit option.

What They Say Went Wrong: Fund co-manager Chris Boyd, who was brought on board last year to fix Giftrust, has several ideas about what went wrong.

For starters, until the end of 1997 Giftrust’s management team “had way too much on their plate,” said Boyd. The team not only ran Giftrust, it also was solely or partly responsible for managing four other funds.

Yet by the mid-’90s, the environment for small-company stocks had turned hostile, as the rally of the early ‘90s fizzled, Boyd noted. “The fund no longer had the wind at its back,” he said. In fact, “the wind turned in our face.”

Of course, that doesn’t explain why Giftrust performed so poorly, even compared with other small-stock growth funds.

Obviously, pilot error had a lot to do with it, which Boyd concedes.

Noted Sheldon Jacobs, editor of the No-Load Fund Investor newsletter: “It’s just been in lousy stocks.”

What Really Went Wrong: The fund got too big too fast. And American Century never capped its asset growth.

Thanks to the spectacular performance Giftrust posted in its early years, it quickly went from being a $29-million fund in 1990 to a $274-million fund in 1994, an $873-million fund in 1996, and a near-$1-billion fund the year after that.

And as with almost all small-stock funds, the more money that flowed in, the harder it was to put it all to work effectively.

In its early years, Giftrust’s minimum 10-year holding period boosted the fund’s performance. Giftrust’s managers knew they could be more aggressive because they were working entirely with long-term money; investors couldn’t withdraw assets at inopportune times.

Now, ironically, that structure may be working to the fund’s disadvantage by locking money in and keeping the fund big--at a time when the best small-stock strategy has been to stay focused on relatively few issues.

The Plan to Turn Things Around: American Century has already beefed up Giftrust’s staff of analysts, Boyd noted. And the soon-to-be five-member management team that works on Giftrust can now concentrate on this fund and just one other, not four others.

“We will eat, live and die by how these funds perform,” Boyd said.

Also, Boyd vows to adhere to American Century’s “process,” a stock-selecting system in which companies with strong earnings prospects are identified quantitatively (i.e., by screening financial data) while the fund managers investigate the firms qualitatively (looking at management, for example).

Can This Fund Be Saved? In its annual report, the folks at American Century note that “in the past, Giftrust has snapped back and more than compensated for periods of weakness.”

And Boyd argued: “I would hope people would realize that even if they did get in in 1995, they still have a number of years left” before the minimum 10-year holding period is up.

But Giftrust has never been this big, in terms of assets. Nor has it suffered such a long period of weakness.

On the positive side, the fund, like most small-stock funds, has rebounded strongly over the last few months, gaining more than 30% from the stock market’s October lows.

Yet in the full year that Boyd and his team have run the fund, they’ve lost investors more than 9% (through January)--while the average small-stock growth fund gained more than 10%.

“It shouldn’t take that long” to turn things around, said John Rekenthaler, director of research for fund tracker Morningstar Inc.

To be sure, Giftrust’s management team has found some success with its other fund, American Century-Twentieth Century New Opportunities. That fund, also focused on small-stock growth, was up 18.5% in the 12 months ended Jan. 31. But New Opportunities has only about $262 million in assets.

Boyd noted that “because of Giftrust’s size, and the fact that liquidity in small caps has really dried up, it’s easier to buy smaller names in New Opportunities than in Giftrust.”

So even if Giftrust’s current managers prove to be superior stock pickers, it will be that much harder to post strong numbers in Giftrust. (For the record, American Century will close New Opportunities to new investors if assets reach $400 million--something they didn’t do with Giftrust.)

The bottom line for Giftrust: “If I could sell it, I would,” said newsletter editor Jacobs. Obviously, not everyone can because of the 10-year lock-in provision. But those who’ve held the fund for a decade or more--or at least long enough to satisfy the holding period--can and should leave, Jacobs argued.

And if you’re thinking of putting new money into Giftrust, you can find a better small-stock growth fund, Jacobs and others say.

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Giftrust’s Numbers

American Century-Twentieth Century Giftrust fund has fallen 6.2% so far this year, about on parwith the average small-stock fund’s losses. But measured against its specific peer group--small-stock growth funds--Giftrust’s numbers have been dismal. Data through the end of January:

Giftrust

Annualized total returns:

1 yr.: --9.1%

3 yrs.: --1.2%

5 yrs.: +7.1%

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Avg. small-growth fund

Annualized total returns:

1 yr.: +10.1%

3 yrs.: +12.8%

5 yrs.: +12.2%

* Source: Morningstar Inc.

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If you own a mutual fund you’d like to have considered for evaluation in Can This Fund Be Saved?, e-mail staff writer Paul J. Lim at paul.lim@latimes.com.