Getting out of the woods
Analysts say it may be time to winterize portfolios
NEW YORK — Fall winds and frequent rain squalls are whipping through Wall Street - and the $5 trillion mutual-fund industry.
Returns fell sharply in the third quarter. Widely popular funds geared to market indexes and large firms experienced significant drops. Bond funds had one of their worst quarters ever.
The upshot: Many financial experts say it is time to batten down the hatches and undertake some old-fashioned winterizing.
For mutual funds, that means trimming away surplus money in high-risk funds and shifting some assets to cash accounts, such as money-market funds. It also means making sure that your portfolio is broadly diversified, holding both stock and bond funds, plus some international issues.
"We moved to a higher cash position a month ago," at the start of September, says Sheldon Jacobs, who publishes the No-Load Fund Investor, in Irvington-on-Hudson, N.Y.
Mr. Jacobs, widely recognized as one of the industry's top fund pickers, boosted the cash portion of his model portfolio from 15 percent to 25 percent, for defensive purposes, as well as to provide a cushion to take advantage of buying opportunities.
Little wonder that mutual-fund investors are confused abo0ut the market.
Market gurus, the folks who track stocks and bonds on a daily basis, are suddenly taking a second look at all the numbers in light of recent selling.
Prudential Securities market technician Ralph Acampora remains bullish for the long haul, expecting solid returns during the rest of 1999 and beyond. But he also tells his clients to "be cautious," this month. For now, the market looks wobbly, Mr. Acampora says.
A negative display
Just how weak can be seen in the roster of highs and lows recorded on the New York Stock Exchange. According to Prudential analyst Bryan Piskorowski, only 840 stocks on the Big Board hit new highs in September; but 4,343 stocks hit new lows. On Sept. 29, the Standard & Poor's 500 Index was down more than 10 percent from its July 11 high. That is considered a "correction," although stocks have subsequently rallied back somewhat.
Mutual funds were also clobbered during the third quarter. For the three-months ending Sept. 30, winners were hard to come by. The average diversified stock fund was down 5 percent for the quarter.
Large-cap value funds fell the most - down 8 percent according to New York-based fund-tracker Lipper Inc. Most other major categories also skidded southward, including large-cap growth funds (down 4 percent), small-cap value funds (down 7 percent), and mid-cap value funds (down 8.9 percent).
On the plus side, funds linked to gold (up 19.2 percent), Japan (up 22.8 percent), and the Pacific Basin (up 8.3 percent) did particularly well. Other winners included technology funds, up 7 percent for the quarter, and international funds, up 4 percent.
Bonds also saw lackluster returns during the quarter, one reason many fixed-income aficionados were yanking money from their funds by the end of the quarter. One exception: intermediate-range bond funds, with durations of 2 to 5 years, produced small gains. (See bond story on page 21.)
Factors that held fund performance down, say analysts, include concerns about rising inflation and rising interest rates, the inability of US export-oriented firms to significantly boost sales abroad, the weakness of the dollar against the Japanese yen, and slightly lower corporate profits.
Rates steady, jitters aplently
The decision by the Federal Reserve not to raise interest rates last week - coupled with a "bias" toward future rate increases if necessary - is not expected to change investors worries about the market.
"More consistent with the Fed's action, the market will continue to be choppy or even decline," says Lewis Altfest, who heads up financial firm L.J. Altfest & Co. in New York.
Still, a poll last week by Quicken.com showed bulls outnumbering bears by a 2-to-1 margin. Corporate profits overall remain in positive territory for the year, as does the giant US economy, which - although slowing modestly - remains strong. Although down somewhat for the quarter, both the Dow Jones Industrial Average and the Standard & Poor's 500 Index are up for the year.
Steps to consider
With financial gains hard to come by and the market's direction difficult to discern, what should investors do now?
Most important, don't panic and don't do anything drastic, says Walter Updegrave, associate editor of Money Magazine and author of "The Right Way to Invest in Mutual Funds" (Warner Books).
Mr. Updegrave warns against the current tendency to gauge the market based just on the latest financial reports coming over the news media - many of them, he says, quite obscure reports. "We've become obsessed over the 'statistic of the day,' " he says.
A better strategy, he says, is for investors to take a hard look at their portfolio and ensure that they have a comfortable mix of funds that can produce broad gains from diverse sectors, including stocks and bonds.
And avoid making sharp changes in your portfolio, says Jacobs.
Most fund experts cite the following steps as helpful in a market pummeled by uncertainties:
*Diversify broadly. It is not enough just to own domestic US funds; a person should also have some overseas holdings, which may not run parallel with the US market.
Also, be "overweighted" in technology, says Charles Kadlec, author of "Dow 100,000: Fact or Fiction," and chief investment strategist for Seligman Advisors Inc. The electronic/computer technological revolution is going "to totally transform" our world in the coming decades, Mr. Kadlec says. But he adds that high tech will remain volatile in the short run.
*Consider a broad international fund, as opposed to a regional or country fund. Japan has looked good in recent months. But looking ahead, gains from Japan, and East Asia in general, may be harder to come by. Solution: Own an international fund that invests in many nations.
*If you trade within a family of funds, make sure you have access to a money-market fund. Reason: If the market did suddenly tank, you'd have a place of refuge.
But remember, if your funds are not in a tax-deferred retirement account, you will incur a tax liability for shifting assets into the money fund.
*If you are in an index fund linked to the Standard & Poor's 500 Index, it is time to shift some of your monies to a "total-market fund," which contains 5,000 to 6,000 or more companies. Most total-market funds are linked to the Wilshire 5000 Index.
*Don't overlook holding a short-term or intermediate bond fund, experts say.
Third quarter highlights Total return Type of fund 3rd qtr. YTD Japan 22.8% 71.2% Gold 19.2 15.2 Asia-Pacific 8.4 46.1 Technology 7.0 43.4 US stock -5.4 5.2 S&P 500 Index -6.4 4.8 Source: Lipper Inc. STAFF
(c) Copyright 1999. The Christian Science Publishing Society