Take a Close Look at Your Fund’s Performance: You May Be Surprised
Year-end mutual fund statements sent in the mail don’t make for inspired reading even after a great year in the markets--let alone a year like the last one.
With many fund statements you get little more than a tally of the number of shares you own and the value of your account at Dec. 31.
Some fund companies, though not all, also list your account value from a year earlier, so you can at least see whether you’re up or down. But most fund firms don’t bother to show what a fund’s total percentage return was during the year, or compare it with an appropriate index. Nor is there any mention of what the fund portfolio actually owned.
All of this was far more aggravating in the pre-Internet days, when you had to wait for fund companies to snail-mail you a more detailed report on how the previous year went.
Now, via the Web, the companies provide a wealth of (more or less) current information on individual funds, of course. Which means the only real value in the mailed year-end statements is as a reminder to get on the Web and check out the numbers behind those flimsy statements--i.e., why your fund did what it did last year.
Investors who say they’re in a particular fund for the long term often take a dim view of doing extensive research on the portfolio. If you’re reasonably happy with the performance so far, and the investment is supposed to be a commitment for 10 or 20 years hence, why bother studying it too closely?
That attitude was probably widespread from 1995 to 1999, when many growth-stock funds turned in handsome results year after year and even “lousy” stock fund performance still meant double-digit returns in many cases. But the party ended in 2000 as the market overall suffered its worst calendar-year decline in more than two decades.
Whether your funds did well or poorly in 2000, now’s a good time to review what’s in the portfolios and how your returns stack up over time.
If for no other reason, do it for this one: If you have multiple funds that you thought owned stocks in different sectors of the market, you shouldn’t find out the hard way that your funds have largely duplicated each other--making a joke of your diversification attempts.
A spin through your funds’ Web sites, which by now ought to have most of their data updated through Dec. 31, will give you a sense of how your money was invested last year by your fund manager, and--more important--will show you how the fund was positioned as the new year began. Here are some things to look for as you review your funds’ Web pages:
* Performance. Most people will start a fund review by looking at performance data. At a minimum, fund Web sites provide total return data for 2000 and for the last three years and five years (usually annualized), assuming the fund is at least a few years old.
You’ll also see some benchmark with which to compare your fund’s results. Generally, that’s the blue-chip Standard & Poor’s 500 index, even though that arguably may not be the best yardstick for your particular fund.
Don’t be surprised if a Web page tries to put the best face on a bad year. The page for the Strong Blue Chip 100 fund (at https://www.estrong.com), for example, starts with a look at fund-tracker Morningstar Inc.’s rating of the fund (four stars). Farther down you find that the fund sank 18.6% last year, more than double the decline in the S&P; 500.
Janus Funds’ Web site (https://www.janus.com) has a nice feature that lets you chart funds’ performance against major market indexes for time periods you choose.
The Clipper Fund (https://www.clipperfund.com) shows you how the fund did against the S&P; 500 each month last year.
* Industry sector allocations. What has the fund manager done with your money? Check out the part of the Web page that shows how the fund’s assets were divided among stock industry sectors.
Most funds give you the 10 largest industry weightings in the portfolio. The Web page for the T. Rowe Price Capital Appreciation fund, for example (https://www.trowe price.com), shows that electric utilities were the biggest sector represented in the fund as of Dec. 31, at 15.7% of assets. Next was the domestic oil sector, at 8.2%.
Sector weighting are important for two major reasons. First, you should be comfortable with what the portfolio manager has done with your money. If you expected a fund to invest heavily in certain industries, and the manager is far afield in his or her sector bets from what you assumed, you may not want to own this fund anymore.
Second, if you own a number of funds, and your goal was to have diversification across a broad range of industries, you should compare the sector weightings of each of your funds to be sure that they aren’t all focused on exactly the same sectors.
Granted, generic sector names can be confusing. The Web page for the Janus Enterprise fund, for example, tells you that 9.9% of the fund was invested in “medical: biomedical and genetics” stocks at Dec. 31. Most investors can figure out that means biotechnology.
But 4.6% of the fund is invested in “therapeutics.” Say what?
* Top stock holdings. A fund’s industry sector allocations can give you a good overview of where your money has gone. But most investors are probably more interested in the biggest individual stock bets the fund manager has made.
Most fund Web pages list at least the 10 largest stock holdings, and most now are updated through Dec. 31. The Selected American fund (https://www.selectedfunds.com), for example, had nearly 5% of its assets in conglomerate Tyco International at year’s end. The second-biggest holding was American Express, at 4.3%.
As with industry sector weightings, you should be generally comfortable with the stocks your fund manager has chosen as his or her biggest bets--because they’re your biggest bets, too. But that doesn’t mean you have to like every stock, or understand exactly why each stock was chosen for the portfolio.
Also as with sector weightings, compare the largest stock holdings of each your funds. If it turns out that many of your funds are focused on exactly the same stocks, you may not have the diversification you hoped for.
Janus takes longer than most fund firms to tell what its most recent biggest holdings were. Its Web site currently lists the largest holdings as of Oct. 31. But Janus at least provides a thumbnail description of each major holding, something most funds don’t do.
Something some funds do, and more should: provide an average price-to-earnings ratio for the stocks in the portfolio.
* Cash holdings. Many long-term investors believe their stock funds should stay fully invested in the market at all times. A review of your fund’s cash holdings at Dec. 31, as a percentage of total assets, will tell you how much of your money was out of the market at that point.
A fund can hold a high cash balance for one of three reasons: The manager is trying to time the market, the manager is taking in large sums from new investors and hasn’t been able to put it all to work or the manager is fearful of heavy redemptions by shareholders and is keeping cash high to meet them.
There is no single “correct” cash percentage, but whatever your fund’s cash stake is, you should be OK with it--or you should be in a different fund.
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Tom Petruno can be reached at tom.petruno@latimes.com.
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Fund Cash Holdings: A Sampling
Do you expect your stock mutual fund manager to stay fully invested in the market at all times? Some investors do, figuring that managers who try to build up cash in troubled market periods will simply miss out on any surprise rallies. But a look at some blue-chip-stock funds’ cash balances at year-end 2000 shows a big difference in managers’ attitudes about cash holdings. A sampling of fund cash levels at Dec. 31:
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Fund Pctg. of portfolio in cash at year-end Clipper Fund 25.0% Janus Twenty 11.8% Dodge & Cox Stock 7.9% Fidelity Growth & Income 7.1% PBHG Large Cap Growth 6.7% Janus Fund 3.2% Fidelity Blue Chip Growth 2.9% Strong Blue Chip 100 2.0% Vanguard Morgan Growth 1.0% Vanguard Windsor 1.4%
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Source: Fund companies listed
