The overseas allure, and a comeback for a big name
For stock mutual fund managers and their investors, some trends accelerated in 2007 -- and some came to a screeching halt. Here are a few of the industry highlights for the year.
U.S. individual investors continued to be ravenous for foreign-stock mutual funds last year, at the expense of domestic stock funds.
Investors pumped a net $129 billion into foreign funds in 2007 through November, lifting total assets to $1.68 trillion, according to the Investment Company Institute, the fund industry’s chief trade group.
Foreign attraction remains strong
By contrast, domestic stock funds had a net outflow of nearly $37 billion in the same period. Assets totaled $4.92 trillion in those funds at the end of November.
For 2005, 2006 and 2007 combined, the net inflow to foreign funds was a stunning $382 billion, institute data show.
Domestic funds’ net inflow for that entire period: a mere $5 billion.
Net cash inflows or outflows to mutual fund sectors are gross purchases minus redemptions. So in the case of domestic funds, even though many investors have continued to buy the funds -- such as through 401(k) retirement plans -- their purchases have been more than offset by investors’ selling out for one reason or another.
One of the big attractions of foreign funds in recent years, of course, has been their heady gains: Thanks to brisk economic growth abroad and the weak dollar, foreign-focused funds on average have outperformed domestic stock funds every year since 2002, according to Morningstar Inc.
Whenever people chase a hot stock sector their expectations can become self-fulfilling, at least for a time: As U.S. money pours into foreign markets it helps drive up share prices, which in turn attracts more investors.
But no trend goes on forever -- as the once-hot U.S. real estate market vividly demonstrated in 2007.
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Vanguard closes in on American
The Los Angeles-based American Funds group has been the equivalent of a massive vacuum cleaner in this decade: Its stock and bond portfolios have pulled in more of investors’ cash than those of any other fund company since 2002.
But Vanguard Group may grab the top spot for cash inflows in 2007, according to data tracker Financial Research Corp.
Malvern, Pa.-based Vanguard’s stock and bond funds took in a net $70.6 billion last year through November, the research firm said. American Funds was No. 2, taking in $67.6 billion.
In 2006, Vanguard took in $41 billion for the full year, well behind American Funds’ chart-topping inflow of $74 billion.
Vanguard is best known for its index funds, which are designed to track key stock and bond market indexes. Its Total Stock Market index portfolio, which replicates the return of an index that represents the entire U.S. equity market, was a big seller in 2007 as more investors opted to earn the market return rather than try and beat it.
American Funds, by contrast, actively seeks to beat the market. Its biggest fund -- Growth Fund of America -- trounced its peers from 2004 through 2006, and rose 11% last year, twice the 5.5% gain of the Vanguard Total Stock Market fund.
Even so, Growth Fund of America’s return in 2007 lagged the average large-capitalization growth stock fund by 2.4 percentage points. Net cash inflows to the fund slowed with its relative performance.
Still, the fund was the fifth-best-selling portfolio through November, according to Financial Research. And three other American Funds portfolios were in the top 10 for the period: American Capital Income Builder, Capital World Growth & Income, and Bond Fund of America.
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Magellan finally returns to life
Big-name U.S. growth stocks made a strong comeback in 2007, and that was particularly good news for the long-suffering investors in the Fidelity Magellan fund.
The portfolio, once the nation’s biggest stock fund, posted a total return of 18.8% last year, more than three times the 5.5% gain of the Standard & Poor’s 500 stock index. Magellan also handily beat the 13.4% gain of the average large-capitalization growth stock fund.
Large-cap growth stocks such as Coca-Cola Co. and Microsoft Corp. were the market stars of the late 1990s. They crashed from 2000 to 2002, then mostly struggled from 2003 to 2006.
Magellan fared better than its typical peer fund in the large-cap growth category for much of this decade, but that wasn’t saying much: Magellan averaged gains of just 3.4% a year in the five years ended Dec. 31, 2006.
Many investors fled the fund. Its assets, which topped $100 billion in the late 1990s, now total about $45 billion.
But Magellan’s manager, Harry Lange, was in the right place at the right time last year. He owned a hefty helping of tech and energy issues, including Google Inc. and Schlumberger Ltd., and went light on the bank and brokerage stocks that were the undoing of some growth-stock portfolios.
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Hot streak ends for Dodge fund
For most of this decade, investors in the San Francisco-based Dodge & Cox Stock fund have been accustomed to seeing their portfolio near the top of the winners’ list among the nation’s biggest stock funds.
That streak ended in 2007. The $63-billion fund posted a total return of just 0.1% last year.
In the three years ended Dec. 31, 2006, the fund had gained 15.6% a year, trouncing the 10.5% annual return of the average U.S. stock fund.
What happened? Dodge & Cox Stock focuses on big-name “value” stocks, meaning shares of companies that appear cheap based on their earnings or other measures.
Value stocks had mostly ruled the market since 2000, but last year many investors turned away from them.
Many value-oriented funds got hammered in 2007 because they were heavily invested in financial-company stocks, a classic value sector. But that wasn’t what hurt Dodge & Cox Stock, according to Dan Culloton, an analyst at Morningstar Inc.
“The portfolio actually has less money in financial stocks than its peers and the broad market,” Culloton noted in a recent report.
Instead, many of the fund’s picks in areas such as media, healthcare and technology simply went cold for the year.
Its favorite media stocks -- cable TV titans Comcast Corp. and Time Warner Inc., and content giant News Corp. -- all slumped in 2007 on growth concerns.
Pfizer Inc., one of the fund’s big drug holdings, dropped 12.2% for the year. And cellphone maker Motorola Inc., the fund’s No. 3 holding overall, dived 22% as it continued to lose market share to rivals.
Culloton advises patience, given the fund’s stellar long-term results. “We think those who stay the course here will be rewarded,” he said.
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Heebner on a roll for CGM Focus
Ace stock picker Ken Heebner did it again in 2007: His Boston-based CGM Focus fund, which has a go-anywhere approach to investing, rocketed 79.9% for the year.
The $5-billion fund scored big with bets on energy companies including China’s CNOOC Ltd. and drilling-equipment maker National-Oilwell Varco Inc. Another huge winner was Russian telecom firm Vimpel Communications.
CGM Focus also can “short” stocks, betting they’ll decline. Heebner made a savvy short bet on mortgage lender Countrywide Financial Corp., which plummeted 79% for the year.
“His calls were absolutely brilliant,” Morningstar analyst Russ Kinnel said in a report Monday.
Robust gains at Heebner’s other funds, including CGM Mutual, CGM Capital Development and CGM Realty, also showed the veteran manager’s investing prowess.
But because Heebner often concentrates his bets in a handful of sectors, and because he trades actively, his investors have to be willing to accept above-average volatility -- and above-average risk of loss.
It’s easy to forget that when you just made 80% on your money in 12 months.
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