Will Mutual-Fund Fire Fizzle in 1997?
Investors have been pumping record amounts into stock mutual funds, earning sensational returns in 1995 and '96, but raising concern about the risk
| NEW YORK
Mutual-fund investors face great uncertainty again in 1997.
Stock prices rose a remarkable 68.2 percent in the past two years, measured by the Dow Jones industrial average. But market analysts often are warning investors not to expect a repetition this year. Gains, they say, are likely to be less than in 1996. Some predict outright losses.
Embarrassingly, many analysts made similar warnings a year ago. The market ignored them. Here's what a few are saying now:
*"We'll get a bear market at some point during 1997," says longtime mutual-fund guru Sheldon Jacobs, editor of The No-Load Fund Investor, Irvington-On-Hudson, N.Y. Mr. Jacobs says the downturn will be short lived - perhaps four months or less, and then resume its upward course.. The slump, though, could be more than 15 percent, he reckons.
*"We don't expect a crash, or anything like that, but we do expect a dip in the market for several months," says David Blitzer, chief economist at Standard & Poor's Corp., New York. His reason: The Federal Reserve will probably boost interest rates in the spring, following several months of fairly robust economic growth. But he sees stock averages up between 4 and 8 percent this year.
*"This year is a very difficult year to make prognostications about," says Jay Schabacker, editor of Mutual Fund Investing, a newsletter published in Potomac, Md. "But [the market's] got to be down," he says, meaning positive but lower returns than in 1996 and 1995. History shows that when you come off two very strong years, the third year has problems."
*"We are in the acceleration phase of this current cycle; it should be the most exciting, most profitable, and most dangerous part of the entire bull market," says Ralph Acampora, director of technical analysis at Prudential Securities in New York. He sees the Dow closing the year at 8000, up from about 6500 today and 5000 a year ago.
Many analysts expect stock prices to climb about 10 percent this year - about average for the period since 1929.
This bull market is more than six years old, the longest in this century and the second most profitable, exceeded only by the great romping market of the mid-1920s.
Individual investors, particularly baby boomers contributing to 401(k) and 403(b) retirement plans, have become a driving force behind this investment cycle, pouring billions of dollars into mutual funds. The bulk of that money has gone into domestic stock funds. Little wonder: The US economy continues to expand. Corporate profits, while slowing, are sturdy. Inflation is low.
"So far, none of the excesses that signal trouble have appeared," write economists Roger Brinner and David Wyss of DRI/McGraw-Hill, a Lexington, Mass., consulting firm. "Indeed, the Federal Reserve continues to manage the economy on a safe and sensible - if somewhat uneventful - course."
Investors do not seem overly worried. They clearly loved mutual funds during '96 - an infatuation that seems to be carrying into the new year. Last year, investors poured some $210 billion into equity funds, exceeding the $128 billion invested in 1995.
Sanford C. Bernstein, a Wall Street firm, found that individuals are taking more risk in their personal investments today than at any time in the last 50 years. They control more of their own retirement savings through 401(k) or 403(b) plans and individual retirement accounts. Thus, they make decisions previously left to pension-fund managers. Often the money is put into mutual funds.
So far, that has been a good choice. The average equity fund was up 19.5 percent in 1996, according to Morningstar Inc. in Chicago. That compares with the 23 percent gain posted by the Standard & Poor's 500 stock index. During the fourth quarter, stock funds rose 5 percent.
The hotshot funds of '96, in total return, were natural-resource and real estate funds, followed by funds specializing in financial services, Latin America, and Europe. Among general equity funds, the various index funds duplicating the S&P 500 led the pack, followed by growth-and-income and small-company funds.
International funds and gold funds, while up for the year, were laggards.
Funds of funds - which are funds that invest in other mutual funds instead of in specific stocks - won new popularity among investors last year, although there are believed to be less than 50 of them. Most major fund families now have funds of funds and are touting them as a way of retaining customer accounts.
Many fund families are expected to start up bond funds based on the Treasury's new inflation-indexed bonds, when these are actually issued. But with inflation presently subdued, the popularity of the concept remains in doubt.
1996 was a landmark year for a number of funds. Fidelity's Magellan Fund remains the largest US stock fund, with $55.9 billion in assets at the end of 1996. But it has been experiencing net withdrawals after a period of underperforming its peers. Vanguard's S&P 500 index fund was catching up fast, with $30.3 billion in assets at the end of 1996, almost twice its $17.4 billion a year earlier. The Vanguard index fund rose 23 percent during the year, compared with a 12 percent gain for Magellan.
IN fact, of the nation's five largest stock funds, all were up about 20 percent, except for Magellan, which during early parts of the year was hurt by large bond holdings.
Alpha Equity Research in Portsmouth, N.H., reckons 100 of the major Fidelity equity funds underperformed the S&P 500 last year. If they hadn't, Fidelity investors would have been $19 billion wealthier.
But Fidelity had plenty of company. Fewer funds beat the market averages last year. Only one of the 10 largest funds, Vanguard's Windsor Fund, had a higher return than the S&P 500 average in '96. It was up about 26 percent. In 1995, four of the 10 largest funds beat the S&P 500.
Use care in selecting funds, analysts urge. But don't be intimidated by stock market predictions, says Kenneth Janke, president of the National Association of Investors Corp., an association of investment clubs based in Madison Heights, Mich. "Even if there were to be a [market] downturn, you'll probably look back on it someday and say, 'Those were very good times in which to be buying stocks.' "
Still, Mr. Schabacker cautions: "Something may happen" to quell the current investing momentum. "And it may happen early this year. I don't know what it will be. It could be something political, perhaps financial, or something international."
Institutional managers will "react very quickly," he says, possibly pulling back from the market. "[Average] investors must now plan their portfolios as though something were to happen. If they do that, they'll be OK."
Shabacker's strategy is threefold:
1. Look for mutual funds that have weathered past bear markets or down years. The Morningstar and Value Line fund surveys, available at libraries or by subscription, often pinpoint such funds.
2. Be sure you diversify, including into cash, bonds, and international holdings. Shabacker's model portfolio for conservative investors is currently 20 percent cash, 20 percent bonds, 30 percent international funds, and 30 percent US equities.
3. Buy into funds that could do well if inflation were to rise (such as energy/natural resource funds) or if investors were to shift money from stocks back into real estate investment trusts (real estate funds).
During '97, more new funds - and more mergers of fund companies - can be expected within the crowded mutual-fund field, say officials at the Investment Company Institute, an industry trade group in Washington. The big question, however, remains clear: Can the aging bull market continue to romp forward?