| BUSINESSWEEK ONLINE : MAY 3, 1999 ISSUE | ||||||||
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| COVER STORY
How a Market Shift Could Realign the Mutual-Fund Stars "The funds getting all the money and attention [now] will be trailing everyone else" It would take a dramatic shift in the market for industrial stocks to suddenly start outperforming technology names or for small-cap value stocks to beat out large-cap growth stocks. It's still far from clear that the recent rotation in the market away from high-priced growth stocks in favor of downtrodden cyclical issues in the manufacturing, finance, natural resources, and energy industries is more than a blip. In the mutual-fund world, however, even a subtle alteration in psychology could have a dramatic impact. If the market continues to broaden out so that more than a handful of the hottest companies provide the lion's share of the market's returns, an entirely different set of mutual funds and fund families could emerge as the new leaders, says John Rekenthaler, research director at fund-rating service Morningstar Inc. For one thing, index funds, which have beaten about 90% of actively managed funds for the past two years, could start to slip in the rankings. "If the market broadens out, [actively managed] funds will start to close the gap with index funds, no question about it," says Rekenthaler. "And if it broadens out enough, they will not only close the gap, they will exceed the S&P 500 Index." Having a portfolio manager at the helm should count for a lot in a changing market, says Robert G. Morris, director of equity investments at Lord Abbett & Co. "If portfolio managers understand why the market is shifting, it is much more likely they will be able to maximize on the return potential." FADING AWAY. RekEnthaler also predicts that if the market moves away from hiGh-price growth stocks, the funds that have earned top returns and dominated press coverage for the past year will fade from the forefront. Through the end of March, the top 100 performing equity funds listed on Business Week Online's Interactive Mutual Fund Scoreboard included several funds in families such as Janus, Fidelity, Transamerica Premier, and Van Wagoner. Many of those funds could move out of the top 100 if the market starts to favor cyclical stocks. Even at fund families such as Fidelity and Janus, where portfolio managers adjust their style in reaction to market conditions, it will take a few months for managers to implement changes now that their star funds have gotten so large, Rekenthaler says. "The funds that are getting all the money and all the attention will be trailing everyone else," he says. "All kinds of other families, which no one ever talks about except to complain, will get the attention." The category of funds most likely to outperform if the global economy continues to improve and cyclical stocks rebound is mid-cap value, says Morris, whose firm offers Lord Abbett Mid-Cap Value (LAVLX). To find mid-cap funds that aren't so clearly named, he recommends that investors sift through the growth and income category for funds that include mid-cap stocks ($1 billion to $5 billion in market cap) as well as stocks that show up in the S&P Barra Value Index. For investors who don't want to radically alter their portfolios, he suggests shifting assets gradually into the new fund. "A year from now, I think dollar-cost averaging into a different style on a long-term basis will turn out to have been a very prudent thing to do." Of course, many investment advisers are still on the fence about the rotation in the market. "This may just be a temporary thing," says Sheldon Jacobs, editor of The No-Load Fund Investor, a newsletter. "I want more information." He suggests that investors should continue to favor funds that invest in large-cap growth stocks, but that they should maintain diversified portfolios. "INCREDIBLE HEAD FAKE"? Rather than move into undervalued small-cap funds, which are vulnerable if there's a significant correction in the market, Jacobs recommends that investors look at value-oriented equity-income funds (which are similar to, but a little more conservative than, the growth and income category mentioned by Morris). Vanguard Windsor (VWNDX), Windsor II (VWNFX), and T. Rowe Price Equity Income (PRFDX) are worth considering, he says. For investors' core portfolio, he thinks a broad market index, such as Schwab 1000 (SNXFX) or Vanguard Total Stock Market (VTSMX), makes sense as the stock market broadens out. Phooey, says Robert Markman, who manages Markman Multifunds, a family of mutual funds made up of other mutual funds. He continues to recommend that investors concentrate their portfolios in high-growth technology and blue-chip stocks. "This has just been an incredible head fake on the part of the market," he says. While industrial stocks may have outperformed for a few weeks, he thinks that phenomenon will be temporary and that the Information Age will continue to favor technology and growth-stock funds. "We're not going to wake up and find it's 1953," he says. His three favorite funds are White Oak Growth Stock (WOGSX), Marsico Focus (MFOCX), and Rydex OTC (RYOCX), an index fund that owns the largest 100 stocks in the NASDAQ. Markman thinks long-term investors shouldn't be concerned that stocks in many growth funds are considered overvalued. That's short-term thinking, he argues. For fund investors with a three- to five-year outlook, buying industry leaders is more important than looking at valuations. "I don't see a mad rush for people to trade in their Dell computers and buy backhoes," he says. Maybe so. But even a subtle shift in that direction could change the mutual-fund landscape considerably. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 A Wiser Bull? COVER IMAGE: A Wiser Bull? TABLE: The Market Turns From Glamour To Grit CHART: Cyclicals Trump the S&P 500...Industry Comes Back...As Do Financials and Small Caps The Highfliers: From Vertigo to ``Only Very Volatile'' CHART: The Wild Ride for Net Stocks Commentary: Consider This: A Tech Slump May Spark a Hard Landing Boeing Breathes Easier TABLE: Forecast for Boeing: Partly Sunny TABLE: Profit Woes? Not This Time ONLINE ORIGINAL: How a Market Shift Could Realign the Mutual-Fund Stars INTERACT E-Mail to Business Week Online | |||
