An investment field where staying power is extra wise
For a while there it looked as if anything nice that was said about mutual funds was wishful thinking. True, the funds rode the August 1982 bull market to record highs, taking along millions of people who had been introduced to the business with money-market funds and switched to equity funds.
But the climb was a short one. Starting with the second quarter of 1983, equity funds ran up five consecutive quarters of decline. They also chalked up three quarters of performance that was lower than the Standard & Poor's 500 stock index, a benchmark that includes big blue-chip companies and smaller growth stocks.
Now, fund managers have some cheery reports for the holidays.
First, Lipper Analytical Services reported that the five-quarter string of declines was broken by a 6.4 percent gain for the average general-equity fund in the third quarter of this year. The funds still underperformed the S&P 500 for a fourth quarter, but they are expected to catch up soon.
Second, Wiesenberger Investment Companies Service reported that as of Sept. 28, mutual funds turned in the best 103/4-year performance ever. The 332 funds in business for that amount of time showed an average gain of 263.4 percent, compared with an increase of 159.4 percent for the S&P 500. Both gains were based on ''total return,'' which includes appreciation plus reinvestment of all dividends.
Both reports helped support an investment philosophy the funds have long held dear: The best results come to those who have the patience and fortitude to hang in for the long term. Despite the urging of those who have built careers on showing people how to switch frequently in and out of the fastest-moving funds, ''buy and hold,'' or at least a modified version, seems to be the best way to make headway in mutual fund investing.
For the average investor, who has other things to do besides keeping up with the most up-to-date fund numbers, frequent switching for short-term gains is just not feasible, says William G. Droms, professor of finance at Georgetown University's School of Business Administration.
''You'd have to have an extraordinarily high degree of predictive capacity to beat buying and holding,'' Dr. Droms says. An investor would have to pick the right fund - which includes forecasting economic indicators, interest rates, fund performance, and the fortunes of various industries - about 70 percent of the time, he said. He does not believe most people have time for all this.
''I'm not interested in doing a lot of timing or trading,'' agrees Gary Pittsford, a financial planner in Indianapolis. ''I would just as soon ride with the small dips and not worry about getting in and out all the time.''
''Buy and hold'' generally means just that. You buy shares in a fund and let them sit. In the first, second, third, or even fourth year, you may make very little gain if any. But after five or 10 years, the long-term investment policies, plus annual reinvested dividends, begin to pay off in real gains.
The question, then, is what type of fund is best for a long-term investment strategy. Looking at overall performance records, the somewhat more conservative growth and income funds, mixed with some growth and balanced funds, are one way to go.
''The concept of investing long term - outside of being right - means investing with a number of different funds for diversification,'' says Michael Lipper, president of Lipper Analytical. ''It means finding (fund managers) who are good at doing relatively narrow things and staying with them.''
Whether it's gold funds, international funds, high-tech funds, social-conscious funds, or whatever, Lipper says to ''look at the one you're interested in to see how it does versus its peers. Don't measure a gold fund against a high-tech fund or the S&P. Measure it against other gold funds.''
You should also look at times when the fund does badly, he recommends. ''Find out why. Is it inherent in what they do, or some other factor?'' Utility funds, for instance, often start a decline when interest rates rise. But over several years, some of these funds may be able to ride out the ups and downs of interest-rate swings and turn in a good performance.
Here, Lipper says, is where it pays to look at a fund's down cycles. Some growth funds, he says, went down 40 percent in 1973 and another 40 percent in the next nine months. But in the 10 years since then, he notes, these funds are up 678 percent.
''So if you're the kind of person who can tolerate these drops, you may be rewarded for your patience,'' he says.
Investing for the long term implies, of course, looking for funds that have been around a long term. ''I don't favor going with a fund without at least a 10 - to 15-year performance record,'' says Bruce Dayton, a financial planner in Weston, Mass. Fifteen years takes in the 1973-74 bear market, a debacle many fund-watchers regard as a test of how mutual funds do in bad times as well as good.
The rewards for patience can be seen in places like the Charter Fund, a Dallas-based no-load fund that emphasizes capital appreciation (income only incidental) with stocks like IBM, Apple Computer, Wal-Mart Stores, Toys ''R'' Us , Wendy's International, and General Motors.
For the 12 months that ended Sept. 30 Charter showed a 9.93 percent loss, according to Lipper's quarterly report. Its year-to-date record was also down, 7 .12 percent.
But as time marches ahead, so does the fund. For five years, the fund was ahead 102.26 percent, and its 10-year record shows a gain of 606.01 percent. This does not put it in the top 25 on Lipper's list for 10-year performance (you had to have a gain of 794 percent to make it there), but this long-term record is typical of many mutual funds in this category.
Charter is also not high in the list of funds with big assets. In fact, with only about $70 million in its till, Charter is small enough to qualify its president, Julian Lerner, for the small-funds committee of the Investment Company Institute, the mutual fund trade group. Mr. Lerner is now chairman of that group.
Lerner has two main criteria for selecting a mutual fund, which, of course, fit his fund: ''First, be certain that the method of stock selection is reasonable and is something you agree with.
''Second, be sure that the people who have been doing that selection are still there.'' Lerner has been the primary manager of his fund since the first shares were offered in November 1968. ''I am the owner of our management company ,'' he stresses. ''And I ain't going anywhere.''
Another fund that seems to cater to long-term investors is the Strong Fund of Milwaukee. Actually, there are two funds - the Strong Investment Fund and the Strong Total Return Fund - managed by Strong/Corneliuson Capital Management. Both are no-load funds.
Unlike Charter Fund, however, the Strong funds have not been around that long; the first shares weren't sold until Janyary 1982. Yet William Corneliuson, the fund's president, agrees with Mr. Lerner's view of looking for long-term performance. Mr. Corneliuson points out that he and Richard Strong, the chairman , have been managing money privately since 1974, with the same standards they use for the funds.
This includes a prospectus that allows the funds to switch all or part of their assets from equities to cash equivalents, like money-market instruments, whenever the market seems to be turning down. Prior to the August 1982 bull market, for instance, the funds were almost 100 percent invested in cash equivalents.
These days, Mr. Corneliuson says, the funds have been buying more long-term bonds in an effort to ''lock up some of these high yields we're seeing now. We began doing this last summer.''
This investment philosophy has attracted about $225 million to the two funds in less than two years, about 40 percent of it for individual retirement accounts, Keoghs, and other retirement vehicles, Corneliuson says.
Lipper does not have any five or ten-year records for the Strong funds, of course, but the Investment Fund showed an 8.07 percent gain for the first nine months of this year and a 5.28 percent gain for the 12-month period ending Sept. 30. The Total Return Fund's nine and 12-month figures shows gains of 8.49 and 6. 51 percent, respectively.