The rising stock market of 1980 proved to be a boon to equity-based mutual funds. That was particularly so for the smaller growth funds oriented toward investing in small to medium-size companies with solid records of earnings growth.
Energy production and equipment issues dominated the portfolios of the three best-performing mutuals, as measured by wiesenberger Investment Companies Service. The top three gainers of last year, ranked by the percentage gain in their net asset value per share from year-end 1979 to year- end 1980, were Hartwell Leverage Fund, up 93.9 percent; Stein Roe & Farnham Capital Opportunities, up 76 percent; and Constellation Growth Fund, up 74.5 percent.
One reason for these impressive gains, according to Paul Johnston, editor of Wisenberger's Current Performance and Dividend Record, is that these growth funds have less money than do the larger mutuals, and therefore it is easier for them to post strong percentage gains. "Because their asset base is smaller," Mr. Johnston says, "they perform better."
Many argue that smaller funds have more flexibility in buying stocks, particularly of small companies. They can buy shares or sell shares in quantities significant to the fund but not in such volume as to cause large price movements.
In addition, the number of shares outstanding of all three funds increased dramatically. This gave them the ability to snatch good buys when they came along without necessarily unloading other stocks in their portfolios.
"Investors have gotten over the shock of the poor markets of 1973-74," explains Alfred Kugel, portfolio manager of Stein Roe & Farnham Capital Opportunities Fund, and vice-president of its management firm. The number of outstanding shares in the Capital Opportunities fund increased from 2.8 million at year-end 1979 to 4.75 million at year-end 1980. Mr. Kugel believes the smaller investor returned to equity-based mutuals, which have seen their number of shareholders dwindle in years past, because of the overall upward movement of stock market prices in the past year. "Where else could they put their money?" he asks.
The portfolio managers say they've made their money mostly by investing in growth companies, including many traded over the counter, and staying away from blue chips.
"There is no stock on our list that would be familiar to the uninitiated," says John Hartwell, president and founder of the Hartwell Leverage Fund, New York, whose net value asset per share rose from $15.31 at the end of 1979 to $26 .69 by the end of 1980. Mr. Hartwell says that 100 percent of his fund (with total assets measured at $14.2 million on Dec. 31, 1980) was invested in stocks through all of last year.
Although he believes the market will continue to rise in 1981, Mr. Hartwell adds that it will be difficult to beat the gains of the last year. He says that 1980 "was the easiest year from that point of view. We had no losing stocks. Even the ones that didn't go up didn't go down."
Some of the Hartwell's best stocks for price appreciation were Tandem Computers, trading at $20 at the beginning of 1980 and closing the year at $70, and Vargo, an oil service stock, which started the year at $6.50 and finished at
The largest concentration of the Hartwell portfolio is the 23 percent devoted to high-technology companies, including Cray Computers, Quotron, Tandy, and General Data Communications. About 15 percent of assets are in TV-related companies, such as Telecommunications, Sony, and United Cable TV. Mr. Hartwell says 14.5 percent of assets is invested in oil service stocks and 12.5 percent in oil production stocks.
Hartwell Leverage Fund, a no-load fund, has never paid dividends since its inception in 1968 with a capital base of $60 million, according to Mr. Hartwell. Wtih poor market conditions diminishing its asset base, Hartwell Has been nursing a tax-loss carry-foward until this year, which has offset any capital gains. Mr. Hartwell says he anticipates the fund will pay its first dividend sometime in 1981.
The second-ranked fund, Stein Roe & Farnham Capital Opportunities, Chicago, will follow the same portfolio strategy in 1981 that helped increase its net asset value per share from $15.70 at year-end 1979 to $26.05 at year-end 1980, says Mr. Kugel, who manages the fund's $125 million in assets.
"Our expectation is that we will have 'stagflation' -- a slow-growing economy and inflation -- during the period of 1979 through 1981," he explains. "In order to be successful, we bought stocks that were cheap and attractive. We wanted to buy companies that could outgrow the rate of inflation and that are not sensitive to an earnings decline because of a recession."
Mr. Kugel says energy production and service stocks and technology issues are those sorts of companies, and he has invested 75 percent of his portfolio in them. He adds that the Capital Opportunities fund also has holdings in diverse consumer companies, such as Federal Express.
Some of the fund's best stock performers include Amarex, an oil production stock bought at $14 which rose to $38 at the end of the year; Western Company of North America, an offshore driller also held by the Hartwell Leverage Fund, which went from $19 to $57; and Prime Computer, which started the year at $11 and finished at $41.
Capital Opportunities is the only one of the top three mutuals to pay out of dividend and capital-gains distribution to shareholders. At the end of this month, shareholders will receive about $1.40 per share of capital gains, compared with 92 cents a share last year, Mr. Kugel says. He adds that the dividend payable at the end of this month is likely to be less than the 25 cents a share paid out last year.
He is optimistic about the performance of the equities market in the enxt 12 months. "We expect the market to rise, but to what extent will depend on the proposed programs and their implementation by the Reagan administration," he says.
A surge of new shareholders helped to boost the assets of the third-ranked Constellation Growth Fund from $12.96 a share at the end of 1979 to $22.61 at the end of 1980, for a total of $55 million in assets. The number of shares outstanding of this no-load fund, managed byWeingarten Management Corporation in New York, more than doubled, from 910,000 to 2,423,000 during the same time, said Harry Hutzler, portfolio manager and vice-president of the management firm.
Although Constellation is heavily invested in natural resources and equipment stocks (35 percent of the portfolio) and technology (21 percent), it also invests 11 percent of its assets in medical products and services stocks, such as National Medical Enterprises, a hospital management firm, which went from $18 (adjusted for a 3-for-2 stock split) to $37 over the course of last year, and US Surgical, a hospital supplier, which rose from $17.50 to $29.50 during the same time.
"We concentrate on secondary issues," Mr. Hutzler says. He describes those issues as "not the big ones, not the small ones, but medium-size companies." He adds: "Growth in earnings is the key factor in picking stocks. When earnings fall below the level we think they should be at, we sell."
Constellation rarely holds its assetts in cash. "We are fully invested unless there are extraordinary circumstances," says Mr. Hutzler, who notes that his portfolio includes more than 100 stocks. He typically invests half a million dollars in any one stock. The fund intends to follow its small, general pattern of investment in 1981.
Constellation has not paid out any dividends or gains to its shareholders since Weingarten took over its management four years ago because of a large tax-loss carry-forward, which was cleared in 1980, according to Mr. Hutzler.