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BusinessWeek: February 1, 1999 |
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Special Report: The Best Mutual Funds
The Best Mutual Funds Which equity funds give investors the most for their money? Our Scoreboard gives you the lowdown Well, maybe shareholders should be thinking about firing their fund managers. Look at the average mutual fund, and you'll wonder what these highly paid specialists were doing with the money. U.S. diversified equity funds managed to muster an average total return of only 14.1%. Count in the international and specialized portfolios, and the return drops to 11.4%. And last year was no exception: The funds have trailed the S&P 500 in each of the last five years. Of course, shareholders can't fire a manager, but they can fire a fund by pulling their money out. With such lackluster performance throughout the $5.4 trillion industry, investors need to put their funds under a microscope to make sure that they're getting the most for their money. Is there a legitimate reason for a fund's lagging performance, or did the manager make some bad calls? And even if the return was acceptable, did the manager expose you to higher levels of risk than you might have been comfortable with? In an era of high valuations and jittery markets, risk matters. That's how BUSINESS WEEK's annual Mutual Fund Scoreboard can help you. The highlight of the Scoreboard is the BUSINESS WEEK ratings, which incorporate both how a fund adds to your wealth and how much risk a fund manager took on to do it. These ratings start with a fund's five-year performance, a point where many other performance ratings also end. But our system then adjusts the returns for downside volatility--we're assuming you're not upset if your funds go up--and re-ranks the funds. The top 7.5% of these funds earn A's for superior risk-adjusted total returns. This year, 104 funds earned the top grade out of nearly 1,400 equity funds with five years' history, the minimum track record required for a rating. (Next week, we rate bond funds.) The Scoreboard data are prepared by Morningstar Inc. RETURN FOR RISK. The A-list is a wide-ranging lot, from Legg Mason Value Primary Shares, up an astounding 32% a year over the last five, down to the plodding but steady Fidelity Asset Manager: Income, with just a 9% average annual return. What they all have in common is a superior return for the amount of risk they took. Smack in the middle of the list is MFS Massachusetts Investors Trust A, with 23% a year total return over the last five. The fund, now with $6.7 billion in three classes of shares, opened for business in July, 1924. Lead portfolio manager John D. Laupheimer, who has run the fund since 1993, describes it as a "conservative growth" portfolio looking to invest in blue-chip growth stocks "at the right price." He scored well on that count, last year buying shares of IBM at prices under $100 each. It's now $192, and is one of his largest holdings. Large-cap funds, mainly those that invest in large growth stocks, dominate the A-list. That shouldn't be surprising, as large caps have trounced mid-cap and smaller-cap companies every year for the last five years. And growth funds, which emphasize companies with more reliable and sustainable earnings growth, have prevailed over value funds, which often buy more cyclical companies when they are out of favor and bet on the rebound. Domestic hybrid funds, which are conservatively run mixes of mainly large-cap stocks, bonds, and sometimes cash, are also well represented on the list. In four of the last five years, the bonds added some stability during volatile stock market swings and capital appreciation as interest rates moved downward. Few mid-cap and small-cap funds made it to the A-list, and not one international fund. Overseas markets in general have underperformed the U.S. every year since 1993. Still, investors need to diversify away from large caps. That's why we also rate funds against others in their category (page 76). Looking for a small-cap growth fund with superior risk-return characteristics? Check out Baron Asset or Fasciano Funds. Want to globalize your portfolio? BT International Investment Equity and Fidelity Diversified International stand out among the foreign funds, and Dreyfus Premier Worldwide Growth B and Janus Worldwide shine among the world equity funds. (The difference between world and foreign? World includes U.S. stocks, foreign doesn't.) TURNOVER TALLY. The Scoreboard is a comprehensive guide to fund performance and analysis. In the Scoreboard, which starts on page 86, we have data on 885 funds with assets of at least $200 million. Those, plus 1,833 smaller funds, can be found in an interactive version of our Scoreboard at our Web site, www.businessweek.com. Even better, that online scoreboard is updated monthly. That allows you to keep better watch on how your funds are faring. This Special Report also looks at the flourishing mutual-fund "supermarkets" run by the likes of Charles Schwab, Fidelity Investments, and now even the Vanguard Group, and how they can simplify buying, selling, and managing funds (page 80). Our Scoreboard examines total return, both before and after taxes. It highlights sales charges and expenses, both of which cut into your returns. It peeks inside fund portfolios, reporting on percentage of the assets parked in cash, the stocks' price-earnings ratios, and the untaxed gains that are locked inside and could be passed on to you. It assesses "turnover," the relative frequency with which the manager trades the securities. High turnover can often lead to higher costs but not necessarily higher returns. Before you can evaluate how your funds performed, you have to look at the markets they invest in. Although large-cap stocks have been outpacing the mid- and small-caps for years, in 1998 the disparity intensified. Stocks with market capitalizations above $20 billion were up nearly 26% last year, according to Salomon Smith Barney. But stocks in the next tier, $5 billion to $20 billion, were up only 6.2%, and the $2 billion to $5 billion stocks were down 6.1%. The very smallest, those below $250 million, dropped 24.1%. Given that backdrop, many mid- and small-cap fund managers did yeoman work. "This year especially, you have to judge your funds against those in their category," says Russel Kinnel, equity editor for Morningstar Mutual Funds. Top-ranked Royce Total Return, for instance, earned a paltry 4.8% last year, which sounds lousy. But it's nearly 11 percentage points better than the average small-cap value fund (table, page 78). WINNING HAND. Even funds that traffic mainly in S&P 500 stocks were not assured of success. Microsoft, General Electric, Wal-Mart Stores, and 17 other stocks accounted for nearly 60% of the S&P's return. "There were 15 or 20 big stocks last year, and if you didn't own them, you were out of the running," says Parker Hall, chief executive officer of Chicago-based Lincoln Capital Management Co. and portfolio manager of the A-rated Vanguard U.S. Growth Fund. Fortunately for his shareholders, he owned enough of the right stocks to earn a 40% total return last year, beating the S&P 500 and the average large-cap growth fund. Another portfolio manager who held a winning hand was Robert E. Stansky: He piloted the giant Fidelity Magellan to its best performance since 1995 and the best showing vs. the S&P 500 since 1993 (page 84). Even with a star turn in 1998, Magellan's overall rating is still just C, or average. The dominance of large-cap stocks has worked to the advantage of many fund shareholders. The really large funds with hundreds of thousands of shareholders invest mainly in large-cap stocks--they have to, in order to put their billions to work--and they have earned good returns (table, page 78). That has made it easier for giant management companies such as Fidelity to deliver the goods to their millions of investors. Magellan is closed to new shareholders, as is top-rated Fidelity Growth & Income Portfolio. But the company offers good alternatives, like Fidelity Dividend Growth Fund and even the venerable Fidelity Fund, the company's original offering, which dates back to 1930. Charles Mangum, who took over Dividend Growth two years ago, scored a 36.7% return last year, with a cautious 10% weighting in technology. "Technology's fundamentals are great, but the relative valuations are very high," he says. Mangum, who has run two health-care funds for Fidelity, feels more comfortable with health-care companies and has about 20% of the fund devoted to those stocks. "Many are trading at near-market [price-earnings] multiples with good revenue growth." Still, for all the time put into analyzing companies and managing portfolios, why does the S&P 500 seem almost unbeatable? Part of the reason is the narrowness of the market's advance, concentrated in relatively few stocks. Another part is that the index funds invest every dollar every day, an advantage when stocks are generally rising. Managed funds keep some cash for redemptions--or until managers can find a place for it. Another reason for the index funds' strong returns lies in the construction of portfolios. The S&P is cap-weighted, so the movements of the bigger stocks weigh more heavily in the index' returns. Most managed portfolios are equal-weighted, and boy, that does make a difference. If you calculate 1998's S&P return giving equal weight to each of the 500 stocks, the gain would have been less than half as much. Mutual funds, by and large, try to own more equal amounts of each stock. That means selling shares in winners as they climb, lest they become too large as part of the entire portfolio. Most diversified funds keep their largest holdings well below 10%. "By trimming back larger positions, you're controlling risk," says William N. Goetzmann, director of the International Center for Finance at the Yale School of Management. "An equal-weighted portfolio is probably a better diversified portfolio." And as part of their discipline, many managers set price targets for their stocks--and sell when they hit them. But that discipline doesn't work well in a runaway market. "We used to think our sell discipline gave us an advantage," says Samuel C. Harvey of the A-rated Hilliard Lyons Growth Fund A. "But many stocks we've regretted selling even at a good profit, and it's hard to find new ones to buy." For sure, in the realm of tech stocks at least, holding on has been a rewarding strategy. Look at Legg Mason Value, up 48% last year. The fund acquired America Online and Dell Computer several years ago at a mere fraction of today's price. AOL now makes up 14.7% of the $6.4 billion portfolio, and Dell 8.7%. "You have to hand it to [manager] Bill Miller for seeing the value there and having the prescience to keep them," says Kurt Brouwer of Brouwer & Janachowski, an investment advisory firm that puts its clients' money in funds. But Brouwer would be loath to buy that fund now, since its net asset value incorporates today's high market prices for the AOL and Dell. (Our Scoreboard notes each fund's largest holding and the percentage of assets that it commands.) TAX TIPS. Concentrated holdings in the right stocks help, but you don't have to do that to earn a good return. Consider Analytic Enhanced Equity Portfolio. Since October, 1996, the fund has followed a stock-selection system called SuperStocks, developed by Robert A. Haugen, a finance professor at the Graduate School of Management at the University of California at Irvine. Drawing from the S&P 500, this system attempts to build a portfolio with traits that you can't find in any one stock: high growth rate, high return, and low relative risk. "We're disciplined," says portfolio manager Harindra de Silva. "We rebalance the portfolio monthly and have a 2% maximum for any holding." O.K., he'll let giants like Microsoft and General Electric go up to 3%. "We're not making big bets but just looking for an S&P-like return, with a little extra." Since adopting SuperStocks, de Silva says the fund has earned a 6% annualized return over the S&P. If you're undecided about index funds, you might choose them at least for taxable accounts. Index funds are among the most "tax-efficient" investors. They don't actively trade the stocks in their portfolios, so they rarely make capital-gains distributions. And with dividend yields so low, income distributions are minimal. Even fewer funds beat indexers after taxes than before taxes. Only 56 equity funds in our Scoreboard beat the S&P 500 pretax over the past five years; just 36 did it after taxes. If you're shopping for index funds, you'll find them in the Scoreboard--and 10 pure S&P 500 funds make the A-list. For a plain-vanilla S&P fund, buy the one with the lowest expense ratio. But not all index funds are S&P 500 plays. Vanguard Growth Index is an index of the growth half of the S&P; Wilshire Target Large Company Growth Portfolio buys the large-cap growth stocks in the Wilshire 5000 index. Domini Social Equity Fund tracks the Domini Social Index, which onetime stockbroker Amy Domini says she started in 1990 to test the hypothesis that "social investing leads to lower returns." She starts with the S&P 500 and excludes alcohol, tobacco, and gaming stocks, as well as arms makers and polluters. But Domini says she also judges companies on positive criteria--like diversity in management and corporate philanthropy. "When you follow our criteria, you end up with companies that have more visionary managements," says Domini. Her methods lead her toward investing in high-tech and less in what she calls "rustbucket industries." The fund earned an average 24.3% vs. 24% for the S&P 500, over the past five years. Looking into 1999, many pros suggest buying the laggard funds on the theory that they'll catch up. Beth Terrana, who runs the Fidelity Fund, is not so sure. While she acknowledges the historically wide valuation gap between large- and small-cap stocks, she says many smaller companies will continue to struggle. "The power of scale has grown increasingly important," she says. Perhaps. The best bet is to stick to your asset-allocation plan and be sure you own the best available funds in the categories that are appropriate for your portfolio, which may include small-cap funds. That's just what our Scoreboard is designed to help you do. Return to top | |
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 TABLE The A-List These equity mutual funds have earned A's for delivering the best
risk-adjusted total returns over the past five years.
FUND AVERAGE ANNUAL INVESTMENT RISK
TOTAL RETURN* CATEGORY
ACCESSOR GROWTH** 26.7% Large-cap Growth Low
AMERICAN CENT. EQUITY GROWTH INV. 23.9 Large-cap Value Low
AMERICAN CENT. INCOME & GROWTH INV. 23.7 Large-cap Value Low
ANALYTIC DEFENSIVE EQUITY** 17.2 Large-cap Blend Very low
ANALYTIC ENHANCED EQUITY** 24.3 Large-cap Blend Low
ATLAS BALANCED A** 13.9 Domestic Hybrid Very low
BT INVESTMENT EQUITY 500 INDEX 23.9 Large-cap Blend Low
BT INVESTMENT LIFECYCLE LONG-RANGE** 15.6 Domestic Hybrid Very low
BT INVESTMENT LIFECYCLE MID-RANGE** 12.2 Domestic Hybrid Very low
CALDWELL & ORKIN MKT. OPPORTUNITY 18.4 Domestic Hybrid Very low
CALIFORNIA INVESTMENT S&P 500 INDEX** 23.8 Large-cap Blend Low
CHASE VISTA BALANCED A** 14.9 Domestic Hybrid Very low
CHICAGO TRUST GROWTH & INCOME 24.0 Large-cap Growth Average
CLIPPER 21.3 Large-cap Value Low
COLUMBIA BALANCED 14.8 Domestic Hybrid Very low
COLUMBIA COMMON STOCK 20.6 Large-cap Blend Low
DELAWARE DEVON A** 23.7 Large-cap Blend Low
DOMINI SOCIAL EQUITY 24.3 Large-cap Blend Low
DREYFUS APPRECIATION 24.6 Large-cap Growth Low
DREYFUS S&P 500 INDEX 23.4 Large-cap Blend Low
EASTCLIFF TOTAL RETURN** 21.3 Domestic Hybrid Low
FIDELITY ASSET MANAGER: INCOME 9.0 Domestic Hybrid Very low
FIDELITY DESTINY I 22.8 Large-cap Value Low
FIDELITY DIVIDEND GROWTH 26.5 Large-cap Blend Low
FIDELITY 23.1% Large-cap Blend Low
FIDELITY GROWTH & INCOME 22.7 Large-cap blend Low
FIDELITY SELECT HEALTH CARE 30.5 Health Low
FIDELITY SPARTAN MARKET INDEX 23.7 Large-cap Blend Low
FIRST AMERICAN BALANCED A** 14.2 Domestic Hybrid Very low
FIRST AMERICAN EQUITY-INCOME A** 17.6 Large-cap Value Very low
FIRST FUNDS GROWTH & INCOME III** 22.1 Large-cap Blend Low
FLAG INVESTORS COMMUNICATIONS A 29.2 Communications Average
FLAG INVESTORS VALUE BUILDER A 19.1 Domestic Hybrid Very low
FOUNDERS BALANCED 15.0 Domestic Hybrid Very low
GABELLI ABC** 9.4 Small-cap Growth Very low
GABELLI EQUITY-INCOME 18.7 Large-cap Value Low
GABELLI WESTWOOD BALANCED RETAIL** 16.2 Domestic Hybrid Very low
GABELLI WESTWOOD EQUITY RETAIL** 21.1 Large-cap Blend Low
GALAXY ASSET ALLOCATION RETAIL A 15.6 Domestic Hybrid Very low
GALAXY II LARGE CO. INDEX RETAIL 23.6 Large-cap Blend Low
GAM NORTH AMERICA A** 22.9 Large-cap Growth Low
GATEWAY 10.3 Domestic Hybrid Very low
HILLIARD LYONS GROWTH A** 20.8 Large-cap Value Very low
HOTCHKIS & WILEY BALANCED** 11.5 Domestic Hybrid Very low
INCOME FUND OF AMERICA 14.2 Domestic Hybrid Very low
INVESCO BALANCED 19.3 Domestic Hybrid Very low
INVESCO TOTAL RETURN 16.2 Domestic Hybrid Very low
ISG LARGE CAP EQUITY A 24.8 Large-cap Growth Low
JANUS BALANCED 18.6% Domestic Hybrid Very low
KENT GROWTH & INCOME INVESTMENT** 20.6 Large-cap Value Low
KENT INDEX EQUITY INVESTMENT** 23.1 Large-cap Blend Low
LEGG MASON VALUE PRIMARY SHARES 32.0 Large-cap Value Average
LONGLEAF PARTNERS 19.8 Mid-cap Blend Low
LONGLEAF PARTNERS SMALL-CAP 18.5 Small-cap Value Very low
MAIRS & POWER BALANCED** 17.1 Domestic Hybrid Very low
MAP-EQUITY** 21.9 Mid-cap Blend Very low
MERGER 9.6 Domestic Hybrid Very low
MERRIMAN GROWTH & INCOME** 13.0 Large-cap Blend Very low
MFS MASS. INVESTORS TRUST A 23.0 Large-cap Blend Low
JP MORGAN DIVERSIFIED 15.1 Domestic Hybrid Very low
MOSAIC HILL BALANCED 15.6 Domestic Hybrid Very low
MUNDER INDEX 500 A 23.5 Large-cap Blend Low
NATIONWIDE D 24.1 Large-cap Blend Low
OPPENHEIMER QUEST BALANCED VALUE A 20.8 Domestic Hybrid Low
PAPP AMERICA-ABROAD 24.9 Large-cap Growth Average
PAX WORLD 17.9 Domestic Hybrid Very low
PEGASUS EQUITY INDEX A 23.7 Large-cap Blend Low
PERFORMANCE LARGE CAP EQ. CON. SV.** 22.4 Large-cap Blend Low
PIMCO STOCKSPLUS INSTITUTIONAL 24.9 Large-cap Blend Low
PREFERRED ASSET ALLOCATION 18.0 Domestic Hybrid Very low
T. ROWE PRICE BLUE CHIP GROWTH 23.9 Large-cap Blend Low
T. ROWE PRICE CAPITAL APPRECIATION 12.8 Domestic Hybrid Very low
T. ROWE PRICE DIVIDEND GROWTH 20.5 Large-cap Blend Very low
T. ROWE PRICE EQUITY INDEX 23.7 Large-cap Blend Low
T. ROWE PRICE EQUITY-INCOME 19.9 Large-cap Blend Very low
REGIONS GROWTH INVESTMENT** 22.5 Large-cap Growth Low
RIGHTIME BLUE CHIP 15.3% Large-cap Blend Very low
RIGHTIME MIDCAP** 15.1 Mid-cap Blend Very low
RIGHTIME SOCIAL AWARENESS** 17.1 Large-cap Blend Very low
ROYCE TOTAL RETURN 16.7 Small-cap Value Very low
SAFECO EQUITY NO LOAD 21.7 Large-cap Blend Low
SEI INDEX S&P 500 INDEX E 23.8 Large-cap Blend Low
SEQUOIA 28.1 Large-cap Value Average
SMITH BREEDEN US EQUITY MKT. PLUS** 23.7 Large-cap Blend Low
SSGA GROWTH & INCOME 23.6 Large-cap Blend Average
SSGA S&P 500 INDEX 23.8 Large-cap Blend Low
STEIN ROE GROWTH & INCOME 18.9 Large-cap Blend Low
STRATTON GROWTH** 20.6 Large-cap Value Low
TORRAY 24.2 Large-cap Value Average
TWEEDY, BROWNE AMERICAN VALUE 20.3 Mid-cap Value Low
VALUE LINE ASSET ALLOCATION 22.1 Domestic Hybrid Low
VANGUARD ASSET ALLOCATION 19.6 Domestic Hybrid Very low
VANGUARD BALANCED INDEX 15.8 Domestic Hybrid Very low
VANGUARD EQUITY-INCOME 19.6 Large-cap Value Low
VANGUARD 500 INDEX 24.0 Large-cap Blend Low
VANGUARD GROWTH INDEX 27.8 Large-cap Growth Low
VANGUARD HEALTH CARE 28.4 Health Low
VANGUARD U.S. GROWTH 26.2 Large-cap Growth Low
VANGUARD WELLESLEY INCOME 12.6 Domestic Hybrid Very low
VONTOBEL U.S. VALUE** 21.3 Large-cap Value Low
WASHINGTON MUTUAL INVESTORS 22.1 Large-cap Value Low
WEITZ PARTNERS VALUE 22.2 Mid-cap Value Low
WEITZ VALUE 21.6 Mid-cap Value Low
WILSHIRE TARGET LGE. CO. GROWTH INV.** 26.7 Large-cap Growth Low
*1994-98 pretax returns, appreciation plus reinvestment of dividends and
capital gains
**Fund data in Business Week Online
DATA: MORNINGSTAR, INC.
Return to top TABLE The Best Performers in Their Categories Ratings funds against their peers, these funds earn A's for five-year
risk-adjusted total returns. Not all categories have ratings, since some lack
enough funds to perform a ratings review.
AVERAGE ANNUAL
TOTAL RETURN*
---------------------LARGE-CAP VALUE-----------------
AMERICAN CENT. EQUITY GROWTH INV. 23.9%
AMERICAN CENT. INCOME & GROWTH INV. 23.7
CLIPPER 21.3
FIRST AMERICAN EQUITY-INCOME A** 17.6
LEGG MASON VALUE PRIMARY SHARES 32.0
T. ROWE PRICE EQUITY-INCOME 18.8
SEQUOIA 28.1
VANGUARD EQUITY-INCOME 19.6
VONTOBEL U.S. VALUE** 21.3
WASHINGTON MUTUAL INVESTORS 22.1
--------------------LARGE-CAP BLEND------------------
ANALYTIC DEFENSIVE EQUITY** 17.2
ANALYTIC ENHANCED EQUITY** 24.3
BT INVESTMENT EQUITY 500 INDEX 23.9
DELAWARE DEVON A** 23.7
DOMINI SOCIAL EQUITY 24.3
FIDELITY DIVIDEND GROWTH 26.5
FIDELITY GROWTH & INCOME 22.7
HILLIARD LYONS GROWTH A** 20.8
NATIONWIDE D 24.1
PIMCO STOCKSPLUS INSTITUTIONAL 24.9
T. ROWE PRICE BLUE CHIP GROWTH 23.9
T. ROWE PRICE DIVIDEND GROWTH 20.5
RIGHTIME BLUE CHIP 15.3
RIGHTIME SOCIAL AWARENESS** 17.1
VANGUARD 500 INDEX 24.0
-----------------LARGE-CAP GROWTH--------------------
ACCESSOR GROWTH** 26.7
DREYFUS APPRECIATION 24.6
ISG LARGE CAP EQUITY A 24.8
PAPP AMERICA-ABROAD 24.9
VANGUARD GROWTH INDEX 27.8
VANGUARD U.S. GROWTH 26.2
WILSHIRE TARGET LARGE CO. GROWTH INV.** 26.7
--------------------MID-CAP VALUE--------------------
SOUND SHORE 19.8
TWEEDY, BROWNE AMERICAN VALUE 20.3
WEITZ PARTNERS VALUE 22.2
WEITZ VALUE 21.6%
--------------------MID-CAP BLEND--------------------
LONGLEAF PARTNERS 19.8
MAIRS & POWER GROWTH 22.9
MAP-EQUITY** 21.9
OAK VALUE 21.8
RIGHTIME MIDCAP** 15.1
--------------------MID-CAP GROWTH-------------------
WILLIAM BLAIR GROWTH 19.9
EXCELSIOR INCOME & GROWTH 12.8
FRANKLIN CALIFORNIA GROWTH A 23.5
NICHOLAS II 18.3
T. ROWE PRICE MID-CAP GROWTH 20.6
STRONG GROWTH 24.5
WADDELL & REED GROWTH B 21.7
-------------------SMALL-CAP VALUE-------------------
FAM VALUE 16.0
LONGLEAF PARTNERS SMALL-CAP 18.5
ROYCE TOTAL RETURN 16.7
-------------------SMALL-CAP BLEND-------------------
GABELLI SMALL CAP GROWTH 13.2
WASATCH GROWTH 16.8
WEITZ HICKORY 23.8
------------------SMALL-CAP GROWTH-------------------
BARON ASSET 19.9
FASCIANO 17.5
GABELLI ABC** 9.4
GALAXY SMALL CAP VALUE RETAIL A 15.7
NICHOLAS LIMITED EDITION 15.8
-------------------DOMESTIC HYBRID-------------------
CALDWELL & ORKIN MARKET OPPORT. 18.4
COLUMBIA BALANCED 14.8
EASTCLIFF TOTAL RETURN** 21.3
GABELLI WESTWOOD BALANCED RETAIL** 16.2
INVESCO BALANCED 19.3
JANUS BALANCED 18.6
MAIRS & POWER BALANCED 17.1
MERGER 9.6
PAX WORLD 17.9%
PREFERRED ASSET ALLOCATION 18.0
T. ROWE PRICE CAPITAL APPRECIATION 12.8
VALUE LINE ASSET ALLOCATION 22.1
VANGUARD ASSET ALLOCATION 19.6
----------------INTERNATIONAL HYBRID-----------------
MFS GLOBAL TOTAL RETURN A 12.6
-----------------------FOREIGN-----------------------
BT INVESTMENT INTERNATIONAL EQUITY 15.8
EUROPACIFIC GROWTH 11.3
FIDELITY DIVERSIFIED INTERNATIONAL 13.2
MANAGERS INTERNATIONAL EQUITY 11.2
SOGEN OVERSEAS A 7.8
UMB SCOUT WORLDWIDE 14.5
WADDELL & REED INTERNATIONAL GROWTH B 14.8
------------------------WORLD------------------------
CAPITAL WORLD GROWTH & INCOME 15.4
DREYFUS PREMIER WORLDWIDE GROWTH B 19.8
JANUS WORLDWIDE 19.3
MUTUAL DISCOVERY Z 15.0
---------------DIVERSIFIED PACIFIC/ASIA--------------
MERRILL LYNCH PACIFIC B 2.7
-----------------------EUROPE------------------------
WRIGHT EQUIFUND-NETHERLANDS 21.1
------------------NATURAL RESOURCES------------------
AMERICAN GAS INDEX 13.2
-------------------PRECIOUS METALS-------------------
SOGEN GOLD A -10.0
---------------------TECHNOLOGY----------------------
FRANKLIN DYNATECH A 20.1
----------------------UNALIGNED----------------------
FIDELITY SELECT FOOD & AGRICULTURE 19.9
----------------------UTILITIES----------------------
MFS UTILITIES B 17.6
UAM SAMI PREFERRED STOCK INCOME 4.7
*1994-98 pretax returns, appreciation plus reinvestment of dividends and
capital gains
**Fund data in Business Week Online
DATA: MORNINGSTAR, INC.
Return to top TABLE The Largest Funds Here's how BUSINESS WEEK rates the largest equity funds.
AVG. ANNL.
ASSETS OVERALL TOTAL
FUND BILLIONS RATING RETURN*
FIDELITY MAGELLAN $83.6 C 20.5%
VANGUARD INDEX 500 74.2 A 24.0
WASHINGTON MUTUAL INV. 51.8 A 22.1
FIDELITY GROWTH & INCOME 48.6 A 22.7
INVESTMENT CO. OF AMERICA 48.5 B+ 20.0
FIDELITY CONTRAFUND 38.8 B+ 21.6
VANGUARD/WINDSOR II 31.5 B+ 21.3
AM. CENT.-20TH C. ULTRA INV. 27.2 C- 20.1
VANGUARD/WELLINGTON 25.8 B+ 16.2
FIDELITY PURITAN 25.7 B+ 15.2
JANUS 25.5 B+ 21.2
FIDELITY ADV. GROWTH OPP. 20.8 B+ 20.8
FIDELITY EQUITY-INCOME 23.7 B 18.5
INCOME FUND OF AMERICA 22.9 A 14.2
NEW PERSPECTIVE 21.3 B 16.5
EUROPACIFIC GROWTH 20.8 C 11.3
PUTNAM GROWTH & INCOME A 20.3 B 18.9
FIDELITY BLUE CHIP GROWTH 19.9 B+ 22.7
FIDELITY EQUITY-INCOME II 19.5 B+ 19.3
MSDW DIVIDEND GR. SECS. B 18.5 B+ 18.2
INVESTMENT CATEGORY
FUND CATEGORY RATING
FIDELITY MAGELLAN Large-cap Blend C-
VANGUARD INDEX 500 Large-cap Blend A
WASHINGTON MUTUAL INV. Large-cap Value A
FIDELITY GROWTH & INCOME Large-cap Blend A
INVESTMENT CO. OF AMERICA Large-cap Blend B
FIDELITY CONTRAFUND Large-cap Blend C
VANGUARD/WINDSOR II Large-cap Value B+
AM. CENT.-20TH C. ULTRA INV. Large-cap Growth D
VANGUARD/WELLINGTON Domestic Hybrid B
FIDELITY PURITAN Domestic Hybrid B
JANUS Large-cap Blend B+
FIDELITY ADV. GROWTH OPP. Large-cap Value B+
FIDELITY EQUITY-INCOME Large-cap Value C
INCOME FUND OF AMERICA Domestic Hybrid B+
NEW PERSPECTIVE World B+
EUROPACIFIC GROWTH Foreign A
PUTNAM GROWTH & INCOME A Large-cap Value C
FIDELITY BLUE CHIP GROWTH Large-cap Blend B
FIDELITY EQUITY-INCOME II Large-cap Value B
MSDW DIVIDEND GR. SECS. B Large-cap Blend C
*1994-98 pretax returns, including appreciation plus reinvestment of
dividends and capital gains
DATA: MORNINGSTAR INC.
Return to top TABLE The Fund Categories Only technology, communications, and large-cap growth funds beat the S&P
500 in 1998.
AVERAGE ANNUAL TOTAL RETURN*
CATEGORY 1998 1996-98 1994-98 1989-98
TECHNOLOGY 54.3 22.8 22.9 22.0
COMMUNICATIONS 46.4 25.4 19.7 20.6
LARGE-CAP GROWTH 36.1 26.2 20.8 18.4
LARGE-CAP BLEND 22.1 23.3 19.5 16.3
HEALTH 18.3 17.2 18.4 21.8
MID-CAP GROWTH 18.3 15.5 14.9 15.9
EUROPE 17.7 21.1 17.4 12.3
UTILITIES 17.5 17.2 13.4 13.9
LARGE-CAP VALUE 12.8 19.8 17.9 15.5
FOREIGN 12.0 9.7 7.3 8.5
WORLD 12.0 13.2 11.0 10.9
DOMESTIC HYBRID 12.0 14.6 13.0 12.3
UNALIGNED 10.9 17.0 13.7 16.0
MID-CAP BLEND 9.5 17.7 15.5 14.8
INTERNATIONAL HYBRID 9.1 7.5 6.1 3.9
JAPAN 7.1 -7.0 -2.3 0.1
FINANCIAL 5.1 25.3 23.1 21.9
SMALL-CAP GROWTH 4.6 10.6 11.9 15.5
MID-CAP VALUE 1.5 15.6 14.3 13.5
SMALL-CAP BLEND -2.4 12.8 11.1 11.0
DIV. PACIFIC/ASIA -4.9 -11.4 -7.4 2.1
SMALL-CAP VALUE -5.9 13.8 12.4 12.1
PACIFIC/ASIA EX-JAPAN -10.4 -12.3 -11.2 0.3
PRECIOUS METALS -12.7 -18.9 -13.6 -4.0
REAL ESTATE -16.2 10.8 7.7 8.8
NATURAL RESOURCES -22.4 2.5 5.8 7.8
DIVERS. EMRG. MKTS. -26.3 -9.0 -11.1 2.3
LATIN AMERICA -38.7 -1.1 -6.9 NA
U.S. DIVERS. FUNDS 14.1 18.9 16.7 15.6
ALL EQUITY FUNDS 11.4 15.0 13.6 13.9
S&P 500 28.6 28.2 24.0 19.2
*Pretax return, appreciation plus reinvestment of dividends and capital
gains. NA=Not available
DATA: MORNINGSTAR, INC.
Return to top Bigger May Just Be Better "Supermarkets" offer investors convenience and selection When the first supermarkets appeared on the American landscape, consumers abandoned the local butcher, baker, and greengrocer in droves in favor of the selection, convenience, and lower prices found at the cavernous new megamarts. There's a similar scramble occurring in the mutual-fund arena, as seemingly every bank and discount broker is racing to assemble "supermarkets" stocked with thousands of funds--even those sponsored by competitors. "One of our goals is to be in the center of our investors' entire portfolios, not just off on the side," says Geoffrey Mackey, marketing manager for Milwaukee-based Strong Funds, which, along with Scudder Kemper Investments, recently opened a supermarket. And even Vanguard Group--whose founder and former chairman, John C. Bogle, long derided supermarkets as "mutual-fund casinos"--has added some 2,600 outside funds, if only for defensive purposes. "We didn't put our FundAccess program in place to attract new investors but to keep our own clients, who wanted a sector fund or something else we didn't provide, from going elsewhere," admits Joseph Rizzello, head of Vanguard's brokerage service. BIG SWITCH. Should you start investing at a supermarket? If you're one of the countless early fundholders still juggling a half-dozen or more funds from different families, the supermarkets could simplify your life. Instead of receiving separate monthly or quarterly statements from each fund family, supermarkets like Charles Schwab & Co. can provide a single, consolidated statement--and a single 1099 at tax time showing the previous year's purchases and redemptions. What's more, if you're an investor who likes to switch among funds, using a supermarket can spare you the time it takes to receive the proceeds from one fund and invest them in another. Generally, the supermarkets say they require anywhere from five days to a month to consolidate your fund holdings. After that, you can shift your assets overnight, although more and more supermarkets are quietly imposing penalties to discourage investors from switching. One of the most aggressive crackdowns is coming, perhaps not surprisingly, from Vanguard, which slaps a penalty equal to 1% on any assets transferred within a year. "We have the most restrictive redemption policy in the industry," admits Vanguard's Rizzello. "And if we see a customer using this program for market timing, we'll ask them to exit the program." There are also trade-offs on the service front. For instance, there's no way that the phone reps at Jack White & Co.--a discount broker that boasts one of the largest selections, with roughly 7,500 funds--can be conversant in the subtle distinctions between each fund. For its part, Strong Funds now equips each of its phone representatives with a copy of Morningstar Inc.'s Principia Plus software so they can provide detailed information on each of the 80 funds on its menu. And while the supermarkets do offer consolidated accounting on any funds transferred from other brokers or fund companies when you join, they say they can't get your transaction histories from your old funds. "Generally speaking, the cost-basis information falls back on the client," admits a Vanguard spokesman. If you can pry this information out of your old fund companies or brokers, a few supermarkets, including Schwab, will manually enter this data into your new account. More and more brokerages are offering "no transaction fee" (NTF) programs that waive the traditional commissions, which generally run from $25 to $150 on a $50,000 fund investment. Of the roughly 7,500 funds on Jack White's shelves, 1,300 are NTF funds, 1,700 are no-loads with commissions, and 4,500 are funds with sales loads. Of course, whatever supermarkets lose by waiving the traditional commissions on NTF funds, they make bAck by charging the fund managers themselves with special "administrative" fees--usually 0.25% to 0.35% a year of the invested assets. "We're handling a lot of the shareholder servicing," says Schwab Vice-President Greg Gable. "The fees are just substituting for some of the costs the fund companies would otherwise have to bear themselves." Yet most of White's other funds--4,500, to be exact--still incur up-front "sales loads." Ditto for Waterhouse Securities Inc., where more than two-thirds of its 7,500 funds are load funds. While load funds were originally designed to compensate sTockbrokers and financial planners for their investment advice, the loads here are pocketed by the supermarket--even though they didn't provide any advice. The supermarkets contend that they're offering load funds like those from PIMCO Funds--whose Innovation Fund recorded a smart 79% return last year--because customers are clamoring for them. And the brokers say they are legally prevented from waiving the loads. So where should you shop? If you're already holding a half-dozen funds from different families, the simplest course may be to choose the supermarket that carries the largest number of your current holdings. Here, you may want to call each supermarket or check their Web sites. CHOICE TOOLS. Latecomers like Strong and Vanguard are making no efforts to match White and Waterhouse Securities fund for fund. Instead, they're promoting the notion that they're only selecting the better-performing funds. Fund consultants say that Vanguard, to its credit, has a higher percentage of funds with Morningstar's top ranking than its competitors. If you're looking for help selecting funds that fit your needs, your options drop quickly, since most supermarkets shy away from providing direct advice. Both Schwab and Fidelity Investments, however, have assembled extensive networks of financial planners who are conversant in the funds carried by these giants, and, for a fee, can help suggest the proper mix. E*Trade and Schwab also provide some of the best tools for choosing funds at their Web sites. E*Trade offers a free screening feature that lets users sort through the 3,000-plus funds it offers by 17 criteria--twice as many as Schwab's screen--including performance, annual turnover, and management tenure. For its part, Schwab provides one of the best asset-allocation services, a Java-based program that offers six recommended models based on the user's investment horizon and tolerance for risk. But Schwab doesn't recommend the funds. Picking is the investor's job. And that's the hitch with the new supermarkets: You get aisle after aisle of funds, but it's up to you to stock your basket. Return to top TABLE Sizing Up the Mutual-Fund Supermarkets TOTAL NO-FEE CHARGE FOR BUY/SELL
FUNDS FUNDS OTHER NO-LOAD FUNDS
CHARLES SCHWAB 1,640 1,024 $39 and up
800 435-4000
www.schwab.com
E*TRADE 4,300 1,187 $24.95
800 786-2571
www.etrade.com
FIDELITY 3,900+ 900+ $35 and up direct;
800 544-9697 $28.95 online;
www.fidelity.com $28 on Touch-Tone
JACK WHITE Roughly 1,300 $27 direct;
800 233-3411 7,500 $24 online
www.jackwhiteco.com
SCUDDER 8,000+ 800+ $35
800 700-0820
www.scudder.com
STRONG 80 80 $0
www.strong-funds.com
VANGUARD 2,600+ 948 $35
800 368-1550
800 992-8327
www.vanguard.com
MINIMUM PENALTY FOR
HOLDING PERIOD EARLY SALES OF LIMITS ON
FOR NO-FEE FUNDS NO-FEE FUNDS FUND SWITCHES
CHARLES SCHWAB 180 days 0.75%, or No
800 435-4000 $39 minimum
www.schwab.com
E*TRADE 90 days $24.95 No
800 786-2571
www.etrade.com
FIDELITY 180 days Standard Maximum 15
800 544-9697 transaction in 12 mos. or
www.fidelity.com fee standard fees
apply
JACK WHITE 90 days $50, less than None
800 233-3411 $100,000;$100,
www.jackwhiteco.com more than $100,000
SCUDDER 6 months Standard Yes*
800 700-0820 transaction fee
www.scudder.com
STRONG 90 days $50 No
www.strong-funds.com
VANGUARD 1 year 1%, or Yes*
800 368-1550 $50 minimum
800 992-8327
www.vanguard.com
* At discretion of brokerage
DATA: BW SURVEY
Return to top Sailing Past the S&P How Robert Stansky got Fidelity's Magellan back on course Robert E. Stansky says 1998 was no fluke. Last year, he managed the nation's biggest mutual fund--Fidelity Investments' Magellan Fund--to a decisive victory over its main rival, the Standard & Poor's 500-stock index. Magellan returned 33.2% to investors, vs. a 28.6% gain for the S&P 500, and Stansky is convinced he can repeat. "I always said I could beat the S&P," he says. "If I didn't think I could do it again this year, I wouldn't be here." Whether Stansky outperforms the index that he is benchmarked against is more than a matter of personal pride. If Magellan falls behind the S&P 500 again, disillusioned investors will keep bailing out and the $83 billion fund could lose its ranking as the nation's largest mutual fund, probably to Vanguard Group's passively managed Vanguard 500 Index Fund, which seeks simply to match the S&P 500, not beat it. At stake is not only Stansky's own stock-picking prowess but also the very notion that an actively managed fund can beat a passively managed one. The overall track record is not impressive. Last year, only 17% of actively managed funds beat the S&P 500. "VERY EXPENSIVE." Stansky, 43, who has managed money for Fidelity since 1984, has been under the microscope ever since taking over Magellan from Jeffrey N. Vinik in June, 1996. Skeptics said that no mere mortal could significantly outperform the market with such a big, unwieldy fund, as Peter Lynch routinely did as Magellan's manager in the '80s. Indeed, Magellan trailed the S&P 500 in Stansky's first 1 1/2 years. Last year, though, it came out ahead for the first time since 1993, finishing in the top 16% of 1,472 growth funds tracked by Morningstar Inc. Magellan didn't pull well ahead of the S&P 500 index until the last two months of 1998. Starting on Aug. 31--after the market tumbled--Stansky went on a technology buying spree. By yearend, tech stocks reached 25.8% of assets, vs. 19.8% for the S&P 500 (table). Stansky also owned Internet stocks such as Yahoo! Inc. and Amazon.com Inc., but not enough to have a big impact on the fund's performance. Under Stansky, Magellan is more conservative than it was under any of its previous managers. Lynch traded frequently and usually owned 700 to 800 stocks, sometimes more than 1,000. Vinik, who ran the fund from 1992 to 1996, also traded rapidly, tried to time the market and bought $20 billion in bonds. Stansky liquidated the bond portfolio and trimmed the number of stocks from 455 to 324, sticking mainly with large caps. Tech, financial services, health care, and retail account for 58% of Magellan's assets. The rest is in industrial, energy, media, and consumer stocks. Stansky trades slowly (annual turnover of holdings is only 34%) and doesn't try to guess market turns. Magellan was only 4% more volatile than the S&P 500 last year. Under Vinik, it was sometimes 36% more volatile. Stansky isn't planning any big changes in 1999. He is counting on big caps to continue to dominate. "I can't imagine any scenario that would restore earnings to small-cap stocks without also boosting large caps," he says. His favorite sectors also remain the same: high tech, financial, health, and retail. Talking to Stansky, you might start to worry about stocks. "The market's very expensive. I expect lots of volatility. The economy isn't so robust," he says. But don't expect him to suddenly funnel money into cash or bonds. He sees his job as trying to beat the S&P 500, so he expects to stay fully invested in large-cap stocks. If Magellan loses value but the S&P 500 falls more, he can still claim victory. So far this year (through Jan. 19), Magellan is up 2.5%, vs. 1.8% for the S&P 500. Magellan's 1998 results may help stanch its bleeding of assets. Since Stansky took over, investors have on net withdrawn about $11.1 billion, according to Alpha Equity Research Inc. The fund was closed to new retail investors on Sept. 30, 1997, but remained open to investors through Fidelity-sponsored 401(k) retirement plans. Much of the outflow has gone into index funds. Says Stansky: "I don't blame them for buying index funds....I didn't give people a reason not to buy index funds." Now, he hopes, he has. Return to top TABLE Stansky's Top 10 Biggest holdings as of Dec. 31, 1998
FOURTH-QUARTER
COMPANY STOCK-PRICE INCREASE
GENERAL ELECTRIC 28%
MICROSOFT 26
AMERICA ONLINE 178
INTEL 38
CISCO SYSTEMS 50
HOME DEPOT 55
MCI WORLDCOM 47
LUCENT TECHNOLOGIES 59
WAL-MART 49
MERCK 14
S&P 500 INDEX 21
DATA: FIDELITY INVESTMENTS INC., BUSINESS WEEK
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