One in Four Funds Is Off 30% or More
If your stock mutual fund is down 30% or more this year, you have plenty of company. In some cases good company, analysts say.
So far in this year’s market plunge, one out of four stock funds has lost at least 30% of its value, according to Chicago-based fund tracker Morningstar Inc.
And the “minus-30 club” isn’t limited to the ravaged technology sector. The group of nearly 900 stock funds that were down 30% or more this year as of last Friday includes many names that investors have long thought of as core portfolio holdings, such as the $23-billion Janus Fund, down 34.9%; the $18-billion Fidelity Growth Company, off 39.1%; and the $11-billion Vanguard U.S. Growth, down 43%.
The minus-30 club also includes some of the industry’s most respected growth managers, such as Ron Ognar, whose Strong Growth dropped 41.7%; Warren Lammert, whose Janus Mercury was off 36.3%; and James Callinan, whose RS Emerging Growth fell 43.6%.
As investors in battered tech stocks can attest, the math of recovery can be daunting. If a holding loses 30%, it needs to gain 43% just to recoup that loss; a drop of 40% requires a gain of 67% to break even; a drop of 50% requires a surge of 100%.
Investors who hold members of the minus-30 club in their portfolios may be tempted to launch a thorough housecleaning, sending these funds to the trash heap.
But fund analysts say investors should be more circumspect and not focus just on absolute performance. Instead, they should measure a fund’s returns against its peers, and look at whether management has stuck to its mission.
If your tech fund is down 30% in 2001, for example, you might want to send the manager a thank-you note, because the average tech fund has fallen nearly 55%.
“The question to ask is whether your fund really is underperforming,” said Russel Kinnel, Morningstar’s director of fund analysis. “Two years ago people asked, ‘Why would anyone want to buy Clipper or Vanguard Windsor II?’ . . . Those were ‘deep value’ funds that were out of favor, with good managers who could take full advantage when the pendulum swung back.”
Windsor II lost just 8.4% this year through Friday, while Clipper posted a small gain. Both funds have solid long-term records.
Though Janus Mercury has been a laggard this year, Lammert’s returns for the trailing three and five years are still in the top 10% of the large-growth-stock category, Kinnel noted. He calls the fund a keeper.
Invesco Growth (formerly Blue Chip Growth), however, is the type of fund Kinnel said he probably would dump: “The long-term record doesn’t give me a lot of reason to be enthusiastic, and the fund is not as tame as the name implies.”
Trent May, who took over the fund in 1996, made big bets on tech that paid off until this year, Kinnel said. Now, the fund ranks in the bottom 10% of its peer group for the trailing one-, three- and five-year periods. The fund fell 62.1% in the first nine months.
Besides performance, investors should examine a manager’s strategic and stylistic consistency, analysts say.
Vanguard Group spokesman Brian Mattes said the Valley Forge, Pa., firm looked at Windsor II “a couple of years ago when a few disgruntled shareholders complained, but we determined that [manager] Jim Barrow was doing exactly what he was supposed to be doing as a ‘deep value’ guy.”
By contrast, the firm switched sub-advisors at Vanguard U.S. Growth in June. “We couldn’t understand what was going on with that fund” under the previous management, Mattes said.
Morningstar analyst Christopher Traulsen, who covers Vanguard U.S. Growth fund, said the former managers had a history of buying companies with solid earnings growth. “Suddenly, it seemed they were buying companies like Ariba that didn’t have much, if any, earnings, let alone a history of earnings growth,” Traulsen said.
The new team at U.S. Growth is avoiding unprofitable upstarts, he said, and the fund’s tech weighting has shrunk to about 20% from 50% a year ago.
Investors who have stuck with the fund and taken their lumps may as well hang on, Traulsen said, even though U.S. Growth lost 23% in the third quarter.
“It takes time to remake a portfolio, and you can’t judge anybody on three months,” he said.
But for investors who can’t take volatility, or who simply need to rebalance their portfolios by reducing exposure to growth stocks, Traulsen’s advice on U.S. Growth would be: Why wait? “There’s no harm in taking a tax loss and putting your portfolio in a state that meets your goals,” he said.
Traulsen said worthy alternatives to U.S. Growth include Harbor Capital Appreciation, a large-stock growth fund that lost 29.7% in the first three quarters. Manager Spiros Segalas, who started in 1990, has a stellar long-term record: His 10-year annualized gain of 15.5% is in the category’s top 4%.
Another fund that might appeal to frazzled investors looking to reallocate assets, Morningstar’s Kinnel said, is T. Rowe Price Mid-Cap Growth. Manager Brian Berghuis, whose tenure dates to 1992, has a five-year return that ranks among the top 15% in the mid-size growth stock category. And his year-to-date return is in the top 10%.
“He may bore you to death, but you know he’s not going to get wacky on you,” Kinnel said of Berghuis.
Some managers of hard-hit funds say they are sticking to their long-term strategies.
“You have to be cautious these days, but you can’t hide in a foxhole,” said Ognar, whose three- and five-year returns are in the top half of the group that invest in large growth stocks. “You need to get out there and buy what’s attractive, adjusting your portfolio.”
After the Sept. 11 terrorist attacks, he bought shares of defense contractor Raytheon Co., videoconferencing products maker Polycom Inc. and cellular operator Sprint Corp.’s PCS Group.
On the belief that more interest rate cuts are coming, even beyond Tuesday’s move by the Federal Reserve, Ognar added to his stakes in financial companies like Freddie Mac and Washington Mutual.
And he used post-attack price dips to add to “core holdings” such as General Electric Co., Citicorp Inc., Home Depot Inc. and department store chain Kohl’s Corp.
“Good managers know there are companies they like for the long haul, with clean balance sheets and growing market shares, and when the chance comes to add shares at the right price, they take it,” Ognar said. “That’s what everyone should be doing all the time anyway.”
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Battered by the Bear
This year’s brutal bear market has left about one-fourth of all stock funds with a loss of 30% or more. Here’s a sampling of widely held funds that belong to the “minus 30 club”:
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--Total return-- Assets 3-year Fund (millions) YTD* (annualized) Invesco Growth $787 -62.1% -21.0% Putnam OTC Emerging Growth 1,446 -59.0 -17.5 RS Emerging Growth 2,577 -43.6 +17.3 Vanguard U.S. Growth 11,090 -43.0 -12.3 Strong Growth 1,852 -41.7 +3.9 Fidelity Growth Company 18,113 -39.1 +6.3 Janus Mercury 7,876 -36.3 +6.8 Janus Fund 23,323 -34.9 +0.3 Columbia Growth 1,339 -32.8 -1.8 Putnam Voyager 14,547 -30.0 +3.7 Average domestic stock fund -22.0 +4.0
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* Through Friday
Note: For funds with multiple share classes, returns and assets are based on class A shares
Source: Morningstar Inc.
