Rare find: a rising stock fund
NEW YORK — Call them the few, the proud. They're the handful of equity mutual funds making money in one of the worst trading periods in stock-market history.
"I've seldom seen a market where so many stock funds are so severely down across the board," says one longtime market watcher here. And he first received his broker's license back in the early 1950s.
"What we've got today is water torture day after day of relentless dismal results," adds Neil Eigen, portfolio manager of the J. & W. Seligman Small-Cap Value Fund, which is posting a return of just under 2 percent so far this year. "I've been through this before, back in the early 1970s," Mr. Eigen says. "But for many younger portfolio managers, this is all a shock. They don't understand what is happening."
The current turbulence can be attributed to the war against terrorism following Sept. 11; political unrest in the Mideast and between India and Pakistan; the Enron, Tyco, and other corporate-accounting and business scandals; and sluggish earnings forecasts by most US companies.
According to an analysis by Morningstar Inc. for the Monitor, only 770 or 19 percent of all 4,072 equity mutual funds are in the black through June 17. The average domestic stock fund is down slightly over 11 percent. The Standard & Poor's 500 index, by comparison, is down about 9 percent.
Most of the "survivor funds" come from a very small group of domestic market sectors, says Morningstar: the real estate sector, up 11 percent through June 17; natural-resource stocks, up 10 percent; small-cap value companies, up 5 percent; selected finance firms, up 2 percent.
Among international equities, meantime, precious-metal funds all of which are international are up almost 53 percent, followed by emerging-market funds, up 9 percent; Pacific funds, excluding Japan, up 8 percent; diversified Asian funds, up 6 percent; and Japan funds, up 3 percent. Among the top 20 funds, gold funds dominate.
Even among the stellar performers this year, such as gold and the value-fund sector, gains may be slowing somewhat.
It's getting harder to find solid companies and post good returns "because the past few years have been so extraordinarily good for value companies," says William Lippman, comanager of the Franklin Templeton Small Cap Value Fund.
The fund, managed out of Fort Lee, N.J., has been one of the consistent "winners" this year, not just for parent company Franklin Templeton, but the mutual-fund industry in general. Returns have been running around 5 percent, well ahead of the market.
"We look for mundane companies that are unloved by everyone but us," Mr. Lippman laughs. Among his profitmakers: Brown Shoe Company, up 64 percent since Jan. 1; American National Insurance, based in Texas; and D.H. Horton, a national homebuilding company.
In terms of strategy, should investors stick with the tried and true the current survivors or opt for out-of-favor funds, such as growth stocks, which have been shellacked in both 2001 and 2002?
Eigen sees advantages in both strategies. "Small-cap value should continue to do well," he says. But Eigen also says it may be time to get a position in small- and large-cap growth stocks to be ready for any shifts in sector performance.
"Don't overreact," says Gregg Wolper, an analyst with Morningstar. "Have a diversified portfolio, so that you can capture the gains from current strong performers, while also being able to capture gains from tomorrow's winners."
That might mean having an index fund, such as a total-market fund, or a combination of growth and value funds, Mr. Wolper says.
Also, check out your current funds to see if they are performing roughly in step with the sector they're in. If they have fallen further than relevant market indexes, Wolper says, you may consider shifting out of them.
"It's probably too late to switch over to the current winning funds," says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter. "At the most, you might make gains for five or six months.
"But sometime this year, or next, there will be a rebound in the market, and most likely a shift to different sectors," he says.
Finally, Mr. Jacobs questions the extent of the current downturn. Granted, he says, some sectors such as technology have taken a horrible hit, with many companies having lost up to 90 percent of their value. But for the market as a whole, "the average equity fund has lost around 13 percent during the past 25 months." By contrast, he says, the average stock fund fell close to 40 percent in 1973 and 1974.
The duration of the current downturn may be longer, Jacobs argues, "but the depth of the downturn is nowhere near what it was back in the 1970s."