Some switching might have offset last year's lag in mutual funds
Last year may have been an impressive one for the stock market, but it was not so impressive for mutual funds. In a year when the Standard & Poor's 500 average rose 22.6 percent and the Dow Jones industrial average was up 26.06 percent, mutual funds gained an average 20.2 percent.
With their advantages of full-time professional management and diversification, the funds are supposed to do at least as well as the market, and over the long haul they do. According to Lipper Analytical Distributors, which tracks the funds' performances, the average stock fund gained 299 percent over the last 10 years, while the S&P 500 was up 175.4 percent.
Still, many investors are wondering why some of their funds did not do better last year and what signals they can watch for to tell them it's time to pull out.
For the most part, several funds did very well from August 1982 until about the middle of 1983. This was particularly true of those invested in high-growth companies concentrating in industries like telecommunications and cable television, bioengineering, and computers. But as the prices of these companies' stocks began to fall, the prices of the funds invested in them fell, too. In some cases, the second half of 1983 all but wiped out gains made in the previous nine months.
The funds that held their own in the second half of '83 were those that were able to move away from the most speculative issues. For the mutual fund investor who also wants to hold on to gains, some of the same principles apply: You have to know when to go conservative.
If you have a bent for more aggressive funds, the first step in protecting yourself from market swings is to invest in a fund ''family'' where you can easily switch money from one fund group to another with a telephone call. There should be enough of a selection - a variety of stock funds, bond funds, and a money market fund - that you can respond to changes in the market and in your investment objectives. Being in a no-load fund helps even more, as most switches can be made free of charge.
Still, knowing when to make the switch can be tricky.
''There's no foolproof method'' for knowing when to move from one type of fund to another, says Richard M. Curry, vice-president in charge of mutual funds and insurance at Prescott, Ball & Turben, a Cleveland brokerage.
One way, he suggests, is to keep track of the stock prices as they relate to the book value of the companies. The book value is derived by subtracting all the liabilities of a business from all its assets and dividing the remainder by the number of common shares outstanding. In August 1982, just before the surge in stock prices, the average price of the top 400 stocks in the S&P averages was about the same as their book value. Now, the price-to-book ratio is about 1.5 to 1. When the ratio get close to 2-to-1, Curry says, the stock is considered fully valued. ''At that level, you certainly shouldn't be buying any new stocks, and probably should be selling some,'' he says.
Recalling the beginning of the bull market in August '82, Curry notes that the low price-to-book ratio made it ''an obvious time to move into the market. Yet it was a time of low ebb for mutual funds.'' Mutual funds weren't interested in buying stocks, he notes, but ''when no one's interested in something, that's the time to buy it.''
Although brokerages like Prescott, Ball have plenty of resources for keeping track of this information, it is a little more difficult for the average investor. A person should expect to ''spend the money'' on an investment advisory newsletter like Value Line or a subscription to Barron's.
Another indicator, which Curry thinks is also credible, and easier, is provided by a mutual fund expert, William E. Donoghue.
Calling it the ''12 percent solution,'' Donoghue points out that a rate of 12 percent on money funds or short-term Treasury bill rates seems to be a fulcrum. If rates rise above that level, that is when investors in the stock market start heading for the exits.
As interest rates fall below 12 percent and toward 10 percent and lower, Donoghue contends, then the more sensitive stocks - the sort held by aggressive growth funds - begin to attract more investors.
Donoghue does not suggest shifting all your mutual fund assets into stock funds the minute rates go below 12 percent. He recommends a gradual shift, say 25 percent at a time, to either stock or money funds, as rates move up or down.
Again, the most effective mutual fund investing comes over the long term. Some of the most succesful high-growth funds over 10- and 15-year periods seldom , if ever, score among the top 10 gainers in a single year.
''I think 10-year performance is far more important than what a fund did last year,'' Mr. Curry says.