Blue-Chip Fund Owners Get Taste of Tech Sector’s Pain

Owners of mutual funds that invest in blue-chip stocks can only hope the worst is over.

Some diversified, large-cap growth funds are now suffering the kinds of losses that their technology-fund counterparts endured during the last year, as the recent market sell-off has broadened to include big-name stocks in many sectors.

American Century Ultra, which has $30 billion in assets, is down 21.6% year to date; the flagship Janus Fund, with $35 billion, has lost 18.5%; and among other mega-funds that target blue-chip shares, Fidelity Blue Chip Growth is down 18.4%, Fidelity Growth Company has lost 26.7%, and Vanguard U.S. Growth is down 30%.

Many of these funds are suffering bigger losses this year than they did in all of 2000. Janus, for instance, lost 14.9% last year, Fidelity Blue Chip fell 10.5%, and Fidelity Growth Company lost 6.3%.

Analysts say the sudden wipeout among broadly diversified funds appears to be spurring a growing wave of redemptions by fearful fund investors.

“We’re probably seeing Middle America selling the good stuff, not just the crazy stuff,” said Don Cassidy, senior research analyst at fund tracker Lipper Inc.

Lipper estimates that stock mutual funds overall were hit with net redemptions of $2.4 billion in February, according to revised numbers released Thursday. That would be the first outflow since August 1998, when a record $11.6 billion came out.

But nobody is sure yet how bad last month’s outflows really were. Data tracker TrimTabs.com estimates them at $6.7 billion, and consulting firm Strategic Insight pegs them at about $1 billion. Much of the selling in February appeared to be in funds that invest in foreign stocks, analysts said.

Official figures will be released by the Investment Company Institute, the fund industry’s main trade group, next week.

Regardless, Cassidy said that barring a strong market rally, March is on pace for a bigger outflow than February as sharp declines in such non-tech shares as drugs, financials and retailers compound losses in growth funds’ tech shares.

Even the relatively low-octane Vanguard Group is probably seeing more money going out of than coming into its growth funds, said spokesman Brian Mattes, though money flows overall remain mildly positive this month.

But Cassidy said the trends are pointing to a possible market bottom.

“I’ve been through a lot of these sell-offs, and there are always several stages investors go through,” Cassidy said. “The first is, ‘Ah, no sweat, I’ll buy the dips.’ Then comes disbelief: ‘I’m going to stick with these stocks.’ Next comes anger and denial, and then the final wave: ‘Get me out at any price.’ We might be within days of that final capitulation. This strong trading volume that we’re seeing might be a sign of that.”

According to TrimTabs’ estimates, stock funds overall had a net outflow of $15.3 billion during the week ended Wednesday. If correct, that would be the biggest on record.

Analysts note, however, that as a percentage of total stock fund assets, recent redemptions remain small. “We’re talking about a fraction of 1% of all [stock fund] assets last month,” Cassidy said. “That’s not exactly a run on the bank.”

Fund analysts see some positive trends in growth-stock funds’ comeuppance.

Strategic Insight estimates that U.S. “value” funds, which focus on supposedly underpriced stocks, took in a record $6 billion in February.

The shift toward value should help investors in the long run as they become more diversified, said Phil Edwards, head of fund research at Standard & Poor’s Corp. “Maybe they will buy some of the [value-focused] American Funds . . . rather than just Janus.”

He noted that even the term “value” appears to be back in vogue, as BB&T; Growth & Income fund is changing its name to BB&T; Large Co. Value.

Retirement investors seem to be hanging tight. 401(k) transaction activity has been normal this month, according to consulting firm Hewitt Associates. Mattes said participants in Vanguard’s 401(k) plans have actually reduced their trading activity by 30% to 40% from a year ago.

Still, as popular stock funds slump, investor angst is running high, particularly among retirees, said Newport Beach-based financial planner Laura Tarbox.

“I’ve had some people screaming on the phone,” Tarbox said. “People feel the need to do something at a time like this.” But she said only one client got spooked enough to sell in recent days.

“In most cases we’ve been able to work with clients to help them do something constructive,” she said. “One was going to buy a new car and take a trip but decided to wait instead. Another was planning to retire but decided to put it off until the portfolio gets back to a level that makes him feel comfortable.”

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Fall of the Giants

Major blue-chip stock funds--the funds most popular with investors, especially in 401(k) retirement savings accounts--have suffered deep declines this year as the bear market has spread from technology to many other big-name stocks. How some blue-chip giants have fared:

Blue-Chip Growth Funds Tumble . . .

2001 decline through Thursday Fund name

--14.7% Growth Fund of America

--15.1% Vanguard Index 500

--15.8% Fidelity Magellan

--18.4% Fidelity Blue Chip Growth

--18.5% Janus Fund

--20.4% T. Rowe Price Blue Chip

--21.6% American Century Ultra

--21.8% Columbia Growth

--26.7% Fidelity Growth Co.

--30% Vanguard U.S. Growth

. . . After Years of Heady Gains

The average diversified growth stock mutual fund scored tremendous gains through the late-1990s, thanks to the surge in big-name growth stocks. Annual returns for the average growth fund, as tracked by Lipper Inc.:

Sources: Lipper Inc., Times research