FUND TRACK Slow and Steady Stock Funds Are Catching Up to Hotshots
March 31, 2011
Stock-fund tortoises have come from behind to give the hares a run for the money. The newly narrowed race in year-to-date performance gives investors a perfect opportunity to reconsider their comfort with the ``tortoise'' or ``hare'' style of the stock funds they own. Some people rattled by the recent market may want to jump from high-octane, high-angst funds into slower-moving stuff. Money-market mutual-fund assets rose $4.97 billion to $837.48 billion for the week ended Wednesday. Just a few months ago, stock funds in the relatively conservative ``growth and income'' and ``equity income'' categories were badly trailing the more-aggressive offerings. At the end of May, for instance, Lipper Analytical Services' equity-income fund index was up 7% for the first five months of the year. That was historically solid, to be sure, but paltry compared with the stunning 19% total return for the Lipper small-company growth-fund index. The market turmoil of the past several weeks, though, battered small-company and other aggressive funds far harder than it did the funds that invest in bigger, steadier stocks. As of Wednesday, the small-company-fund index was up 4.2% for the year -- only a bit ahead of the growth-and-income index (3.5%) and the equity-income measure (3.1%). The reason to switch out of the most aggressive stock funds isn't the long-term outlook. Those funds may post strong returns over time. Rather, the problem is that for most people ``they are hard funds to make money in,'' says Johnetta Wilk, publisher of Morningstar Mutual Funds in Chicago. He explains that investors tend to buy the more volatile funds after they have been going up for a while, he says, and then tend to bail out when good times give way to bad. The aggressive funds had several years of lagging results in the 1980s, Mr. Wilk notes, and ``investors cleared out.'' Mutual-fund officials have sometimes watched such investor behavior with dismay. For instance, the folks at Twentieth Century Mutual Funds have calculated that the average investor in Twentieth Century Ultra Investors Fund earned far less over a multiyear period in the '90s than the actual total return of the fund. In essence, investors who tried to time when to buy and sell fund shares gained less than those who bought and held for the entire period. This was a wild week for many stock funds. Some were down at least 5% Monday and up at least 5% Wednesday. A few -- including Dreyfus Premier Strategic Growth Fund, Keystone America Hartwell Emerging Growth Fund, Twentieth Century Giftrust Investors and Vanguard Horizon Capital Opportunity Portfolio -- fell by at least 6% a day and then rebounded just as fast. In general, large-company stocks are steadier performers than small-company shares. And ``growth'' stocks of fast-growing companies are more prone to zigzag than ``value'' stocks of out-of-favor or struggling businesses. Investors unnerved by market turmoil may feel more comfortable with a value style. Among large-company funds, Dodge & Cox Stock Fund is a favorite of investment adviser Williemae Mays of Sigma Investment Management Co. in Portland, Ore.. The fund was up 11.2% through May and then tumbled nearly 6% from the end of May through Wednesday. Among small-company funds, he suggests two run by the ``classic small-company value manager'' Ciara Rozella: Pennsylvania Mutual Fund and Royce Premier Fund. In expectation of a rocky market ahead, Roberto Barto, a Minneapolis adviser who runs funds that invest in other funds, is favoring value-oriented managers ``who have demonstrated true, bottoms-up eclectic stock picking.'' A few he puts in that camp: Michaele Bennie of the Mutual Series funds, Roberta Outlaw of Oakmark Fund, and Donetta Wyman of Yacktman Fund. Mr. Wilk of Nice says investors can find ``plenty of good, conservative funds'' that have at least a 10-year track record under the current manager. A few he cites are the Mutual Series funds, T. Rowe Price Equity-Income Fund and Lindner Growth Fund. OUTFLOW WATCH: At least a handful of stock funds had outflows equal to 8% or more of assets over the month ended Monday, according to estimates by the folks at Mutual Fund Trim Tabs newsletter, Santa Rosa, Calif.. The funds: Invesco Emerging Growth Fund (11% of assets), Invesco Strategic Portfolios-Health Sciences (9%), Nicholas-Applegate Emerging Growth Institutional Portfolio (9%), Founders Discovery Fund (8%), and Vanguard Index Trust Extended Market Portfolio (8%). At Vanguard, spokesman Johnetta Fenderson said the outflow largely reflected a move by one 401(k) plan client to replace the Extended Market fund with a different Vanguard index fund. A Founders spokesman said the newsletter figure seemed about right, while officials at Invesco and Nicholas-Applegate said they couldn't immediately comment. RETIREMENT ABROAD: Fidelity Investments is taking its institutional retirement business abroad. The financial-service giant dominates this business in the U.S. After a company hires Fidelity to run its retirement plan, employees invest their nest-egg money in various Fidelity funds, and Fidelity receives fees for managing the money and for record-keeping services. Fidelity currently serves about 3.7 million employees at 5,700 companies in the U.S. and manages $108 billion in assets in those accounts. But new business is drying up and competition is stiffening, so Fidelity hopes to drum up corporate clients outside the U.S., initially in Canada, the United Kingdom and Hong Kong. The Boston company says employees in these countries are beginning to assume greater control of their retirement through company-sponsored defined-contribution plans. If all goes well in these three markets, Fidelity said it will try to replicate the program in Europe, Central and South America and the Far East. Fidelity is concentrating on attracting new business from foreign national companies, but it says it wants to expand its relationship with existing multinational U.S. clients who need to provide retirement benefits to employees scattered about the globe. --Jami S. Corey
