| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||
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| WHERE TO INVEST -- THE INVESTMENT SPECTRUM
The Wonderful World of Wonderfunds The Internet brings dazzling results for a select few Extreme sports. Extreme retailing. And now, extreme mutual funds--or to be exact, funds with extremely high returns. Of more than 4,400 equity funds in operation since the start of 1999, 78 scored total returns of 100% or more, and 10 of those are above 200% (table). As good as returns have been in the 1990s, only a handful of funds ever gained more than 100% in any calendar year. All told, 1999 is shaping up as a very good year for fund investors. U.S. diversified equity funds delivered an average total return of 20.29%, vs. 16.63% for the Standard & Poor's 500-stock index (through Dec. 10). If the funds maintain their lead over the index through yearend, 1999 will be the first time since 1993 they beat the S&P 500. Add in the returns from specialized and international funds, and results look even better: up 23.42%. Total returns include appreciation plus reinvestment of dividends and capital gains before taxes and are calculated for BUSINESS WEEK by Morningstar Inc. LUCKY SEVEN. The strong results should give the mutual-fund companies a lift, as well. Net cash flow to equity funds ran at a rate of $165 billion through October, and with stocks sizzling in November and December, the final numbers will be even higher. Still, cash inflow won't come anywhere near the $243 billion peak of 1997. But perhaps more troubling for the fund-management companies is that few of them are getting any of that new cash. According to Financial Research Co., some 94% of the money is going to just seven companies, including Fidelity Investments, Vanguard Group, and Janus Capital. ''This is one year when those who invested in funds made more money than [those who] invested in fund-management companies,'' says A. Michael Lipper, chairman of fund-watcher Lipper Inc. Lipper's index of publicly traded fund companies is up just 5.8% year-to-date. There's no great secret about how those extreme funds earned those returns. A few funds did it in Japan, where stocks zoomed for the first time this decade and the yen appreciated against the dollar, which further enhanced returns. However, most of 1999's wonderfunds can attribute their success to technology and telecom stocks--in short, the Internet boom. Tech funds produced the most dazzling results (table, page 148). At the end of October, they were up 65.1% for the year. Just six weeks later, their return was 108.55%. While many attribute tech-stock mania to online traders, fund investors share some of the credit. In the first 10 months of 1999, $17.8 billion in new cash poured into tech funds, compared with $490 million for all of 1998, according to Financial Research. Those who didn't own technology and telecom stocks or underweighted them found themselves struggling during 1999. The $47.6 billion Fidelity Growth & Income Fund, one of the 10 largest equity funds, is limping in the performance derby this year with a 7.39% total return (table). That's because the fund underweighted technology--just 16.4% of the fund vs. nearly 26% for the S&P 500. The fund also overweighted health-care companies, which did poorly in 1999, and most likely detracted from the fund's performance. Vanguard Windsor II, with just a smattering of tech investments, lost money for shareholders during 1999. On the other hand, the Janus Fund, up 40.68%, and Janus Twenty Fund, up 57.73%, showed what giant funds can do when they get things right--like the technology and telecommunications boom. ''We put our stakes in the ground three or four years ago, and it's really paid off,'' says Scott W. Schoelzel, portfolio manager of Janus Twenty Fund. Janus portfolio managers and analysts still like tech and telecom, he says, but they are now searching for nontech companies that will use the Internet to their advantage. ''The companies that 'get it' will trade at huge premiums to their rivals,'' he says. GROWTH LAGGARDS. Tech stocks, with their high price-earnings ratios and price-to-book value ratios, are denizens of the growth fund portfolios. And those stocks are largely responsible for the improved performance of small-cap growth, up 50%, and mid-cap growth funds, up 47.37%. Large-cap growth funds, which trounced the mid-cap and small-cap funds in 1997 and 1998, were the laggards in 1999. Still, their 29.7% return was nearly double that of the S&P 500. Among the value funds--those that invest in the stocks with lower-than-average p-e and p-b ratios--bigger is still better. Large-cap value funds earned 4.14% on average--less than a money-market mutual fund. Mid-cap value funds scratched out a 1.95% gain, and small-cap value funds are up a microscopic 0.19%. Value funds took off last spring, as the more cyclical industries like chemicals and machinery rallied. But the rally didn't even last until summer. By that point, rising interest rates quashed the financial stocks--the other mainstay of the value funds. The surge in small- and mid-cap growth stocks has created some new stars. Among the brightest is the Nevis Fund, up 270.46% this year, the sole mutual-fund offering of Baltimore-based Nevis Capital Management Inc. The fund, run by Nevis partners Jon C. Baker and David R. Wilmerding, makes relatively large bets on a few stocks. It largest holding is Primus Knowledge Solutions Inc., which is about 14% of the fund, and the second largest is Rationale Software Corp., with 7%. Both companies provide software and systems to support e-commerce and are up strongly this year. A large allocation to tech stocks also brought BlackRock Micro-Cap Equity Investors to the fore. ''We don't set out to buy tech stocks,'' says Thomas Callan, a co-manager of the fund. ''We buy them because that's where the growth is.'' The fund nearly tripled this year. Managing microcaps is tricky, since the best stocks quickly outgrow microcap status. BlackRock holds on to winners and lets them climb in market cap as long as the fundamentals are strong but won't add companies if their market cap is more than $300 million. The fund will close to new investors on Dec. 23. TECH TO THE RESCUE. The tech boom also rejuvenated some funds that had faded in recent years, like the high-octane Van Wagoner funds. When Garrett R. Van Wagoner opened his shop in January, 1996, performance soared, money poured in, and by midyear he had more than $1 billion in assets. Returns plunged in 1997 and limped back in 1998. Now, three of the five are up more than 200%, and the worst of them weighs in at 120.68% (table, page 144). The Emerging Growth and Micro-Cap funds are already closed; Post-Venture will close at $1 billion, the others at $2 billion. ''If you have too much money, you can't manage it effectively,'' says Peter Kris, a Van Wagoner managing director. The virtual bear market in value stocks turned many long-run winners into short-term losers. Most notable is the Sequoia Fund, down nearly 18%, thanks to a portfolio dominated by financial stocks. About 25% of Sequoia is in Berkshire Hathaway Inc., run by longtime superstar investor Warren Buffett. Berkshire Hathaway shares are down nearly 22% in 1999. Other seasoned value funds such as Yacktman, Strong Schafer Value, and Vontobel U.S. Value are also on 1999's list of the worst performers. The rise in interest rates is giving bond funds their worst results since 1994. Taxable bond funds have average total returns of just 1.4%. Tax-free funds, on average, have negative returns and are down 3.12%. The best-performing funds were on the fringes of the bond spectrum--convertibles and emerging markets. The top performer, Ariston Convertible Securities, earned a stunning 58.07%, and the top 10 bond funds earned at least 30%. That's unusual, especially in the face of rising rates. But then again, this is the year of extremes.
By JEFFREY M. LADERMAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS The Wonderful World of Wonderfunds TABLE: The Best Returns TABLE: How the Big Funds Fared TABLE: The Worst Returns TABLE: The Best Bond Funds TABLE: A Wide Range in Fund Returns INTERACT E-Mail to Business Week Online | |
