Regional Funds Struggle to Compete
In the vast, crowded mutual-fund market, a tiny group of fund companies think home-town appeal may attract investors.Skip to next paragraph
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They're regional mutual funds, funds that invest in companies located in a single state, city, or region of the country. And investors often like them either because they are like investing in the local economy or because it offers the chance to target some other area's hot prospects.
But while a handful of these funds chart impressive returns, analysts warn that picking a fund based solely on backyard appeal is risky.
Do they rate nationally?
"It's important to look at these funds in a broader context," says Laura Lallos, a senior analyst at Morningstar Inc. in Chicago. "If they can't compete with a broader universe of domestic stock funds, then there is no other reason to invest in them."
Regional mutual funds have been around for years. The first such fund - IAI Regional Fund - a Minneapolis-based fund that targets upper Midwest businesses - was created in 1980.
Yet these funds have never really caught on. Of the thousands of stock funds available, only about two dozen (whose combined assets total $3.3 billion - a mere drop in the mutual-fund bucket) define themselves along specific geographic lines.
In order to be identified as a regional mutual fund, the Securities and Exchange Commission requires that 65 percent of a fund's stock holdings be located within its predefined geographic area. (Most regional funds invest a much higher percentage.)
Regional funds invest most of their assets in small and mid-size companies, primarily growth companies overlooked by Wall Street analysts. Most large companies don't fall into that category.
Portfolio managers contend that investing in their own backyard gives them a home-field advantage over Wall Street analysts who are often picking stocks from thousands of miles away.
And some regional funds bear this out.
The Growth Fund of Washington, the Cincinnati Fund, and the Franklin California Growth Fund all have been in the top quartile of their respective categories over the past three years, according to Morningstar Inc. in Chicago.
California sets the trend
"Our approach to investment is fundamentally driven: Know the companies we're investing in," says Conrad Herrmann, manager of the Franklin California Growth Fund. And with 1,400 publiclly traded companies in California, there's no paucity of investment opportunities.
Since its inception in 1991, it has seen an average annual return of 19.8 percent. (In 1997, the fund rose only 15.7 percent versus 33 percent for the Standard & Poor's 500 index.)
Technology stocks, which account for 30 percent of its portfolio, have contributed to the steady returns. The fund's largest holding is Cisco Systems, which makes computer networking hardware. Others include Synopsys, a technology services firm, Mattel, Computer Science, a computer servicing company, and BankAmerica.
"Certainly it has its appeal to California residents," Mr. Herrmann says, noting that about half of the fund's investors are from the Golden State. "They live here and work here. It's a way they can invest in their state."
"Generally I don't like [regional funds], but if there was one to like, this would be the one," says Gerald Perritt, editor of the Mutual Fund Letter in Largo, Fla.
"If you scratched out the California in its name, this is a good aggressive growth fund," says Mr. Perritt, who ranks the mutual fund as one of the 300 best in the country.
Growth Fund of Washington, which invests in companies in Washington, D.C., Maryland, and Virginia, has also been strong - up 36.6 percent in 1997.
Regional funds have their detractors, who argue that, by definition, a regional fund's choices are limited, particularly a single city or state fund.
And that can limit shareholder return. "Whenever you restrict a portfolio manager's ability to invest ... you tend to restrict the return potential of that fund," Perritt says.
"Anything that limits your investment alternatives is going to hurt you ultimately," says Michael Murphy, editor of the California Technology Stock Letter in Half Moon Bay.
He argues that portfolio managers must visit companies all over the country to invest intelligently in companies in their own backyard.
"What happens if a company in California looks OK, but a company in Minnesota looks great," he says. Why do all that research, he argues, and not be able to capitalize on it?
"I'm very dubious," Mr. Murphy says. "I'm inclined to think they are small ideas and not appropriate for most investors."
Other analysts say it can be risky to invest in the same region in which you live and draw your paycheck.
"Many years ago, regional investing might have made sense," Perritt contends. "But with the proliferation of data sources and telecommunication, I can be just as close to a company in California as I can to one down the street."