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There's Hardly Anywhere to Hide


You've curbed your daily habit of checking portfolio balances online and tuned out the TV pundits. Maybe you've even tacked on a few years to your expected retirement age as market realities have set in. But now get ready for what bond manager Paul McCulley of PIMCO dubbs "PBD"--post-bubble disorder.

What will bring it on? Why, your first-quarter mutual fund and 401(k) statements, soon to arrive in the mail. O.K., so the markets ticked up as the quarter wound down, but it's hardly an elixir for PBD. For the quarter through Mar. 27, the average U.S. diversified stock fund turned in negative total returns of 10.9%, even worse than the 7.9% decline of the Standard & Poor's 500-stock index. Equity funds did slightly better, down 10.4% (table). Worse, not a single equity mutual fund category is in the plus column in 2001. Overseas markets were no refuge: International equity funds posted average losses of 9.8%.

DASHING FROM DOTS. The losses are starting to shake investors' buy-and-hold resolve. During the week ended Mar. 21, investors yanked $6.2 billion out of equity funds, the largest outflows so far this year, reports Robert Adler at AMG Data Services in Arcata, Calif. That date also marked the seventh straight week of outflows from tech funds, which have lost about $2 billion throughout the quarter. "Technology is clearly being rejected by investors," Adler explains. "They've stopped buying, and now they're starting to redeem."

What new money has come into mutual funds has headed for milquetoast investments: $197 billion gushed into money markets alone, a record. And $19 billion went to bond funds, both investment-grade and high-yield. While equity funds lured some $19 billion, the bulk of it came early in the year into small-cap and aggressive growth. Those flows have effectively dried up, with a trickle now going to growth and income funds. "Even the value sectors are not recipients here," Adler says. "Investors have simply become risk-averse."

It's not that those stalwart value funds are holding up so well anyway. They're still outdoing all varieties of growth stock funds--which are down an average of 17.6% in under three months. Still, it's a little hard to get jazzed over your large-cap value fund's 5.1% loss. Last year, small-cap and midcap value fund gains hit the high teens for the first time in years, but preliminary quarter numbers show they, too, are off to a lousy start in 2001--off an average 0.33% and 1.53%, respectively.

Setting this sorry scene has been the nonstop pain inflicted by Nasdaq. The tech index's 14% plunge hollowed out some divots in equity funds of all stripes. The whole mess is proving that, in fact, the Zero Gravity Internet Fund, down 38%, can't defy Newtonian physics. But high-stakes Internet funds aside, the rout has especially sideswiped sector funds: Tech funds' 25.7% loss takes the Oscar for the year's worst performance. Health funds are down 24%, and telecom funds fell 20.8%.

If a fund does happen to be neatly in the black, it's likely to be a bear fund shorting stocks. The ProFunds UltraBear gained 22.8%, while the Prudent Bear and Potomac U.S. Short funds have so far gained about 10.5% each (table). These anti-bull-market funds--plus a scattering of emerging-market and small-cap value funds--are the only ones with double-digit gains.

There are, however, a handful of standouts catching investors' eyes. The Oakmark I fund, for instance, has crept up $200 million, to $2.5 billion, in assets since December. Two years ago, this midcap value fund was four times as big, but investors drifted off in search of supercharged returns. Too bad: The fund is up 7.24% this year, a record net asset value gain for the 10-year-old fund. "Most of our shareholders left before they got the benefit of us being right," says portfolio manager William C. Nygren. Nygren buys companies that trade at 60% discounts to their private market value, leading him to Toys `R' Us (TOY), Washington Mutual (WM), and Black & Decker (BDK). "We were hit hard by redemptions because investors felt they were missing an opportunity to make money," Nygren adds. "I find it hard to believe that growth and momentum funds won't have a similar experience."

Many, in fact, are making the least-wanted list. Janus funds topped the charts until last year as managers loaded up on aggressive tech and telecom names. Now that 8 of the 16 equity funds of the Colorado group are performing in the bottom half of their respective peer groups most have double-digit losses, investors are taking a hike. Blaine P. Rollins, manager of the flagship Janus Fund, shrugs off this year's $1.5 billion in firmwide outflows (from a total of $250 billion under management). "Big whoop," says Rollins, whose fund lost 14%. He won't sell a single share of Cisco (CSCO) or other top-10 holdings, such as Charles Schwab (SCH) and Nokia (NOK). "I don't want to become a REIT and utility fund for just one quarter," he says. "I like to take advantage of the freakouts in these stock prices."

VEXING INDEX. The $34.7 billion Janus fund isn't the only mammoth fund under water. Most of the nation's largest funds share similar fates. That's "no surprise," says James H. Lowell, editor of Fidelity Investors newsletter, since huge funds are near-proxies of the S&P 500 and load up on blue-chips and large-cap tech stocks. With Fidelity Magellan's 10.8% loss is deeper than the S&P's loss, the return is "within easy shooting distance of being able to outperform the index by yearend," Lowell contends.

Portfolio managers with experience in bear markets could ultimately edge out their benchmarks and competitors this year. That means that the ever popular index funds--such as Vanguard Group's $80 billion 500 Index Fund, down 10.2%--could have a tough haul against active managers in 2001. Legg Mason's William H. Miller, for instance, has turned in a nifty 7% return in his newest Opportunity Trust fund. He's the only fund manager to beat the S&P for a decade straight with his Value Trust fund, down 2.7% and still ahead of the S&P. Paul H. Wick of the Seligman Communications & Information fund has earned a 22% annualized 10-year return, although he says he has been hit recently by "tech's worst downturn ever." The fund is down 50% over the past year, vs. Nasdaq's 60% tumble. But so far in 2001, it has shed just 0.4%--a huge edge over rival funds averaging 30% losses. Holdings include CSG Systems International (CSGS) and Nvidia Corp. (NVDA), stocks that won't be immune from a tech rout forever, says Wick, who worries about future outflows: "There are lots of things that keep me awake at night, and that's one of them."

BANKRUPTCY BET. A handful of successful managers are buying stocks that buck the downturns. The Heartland Value Fund is one such fund. It invests in low-price small-value companies with an average price-earnings ratio of 11 times 2001 earnings and which trade at less than 1.5 times book value. Still, its managers forecast up to 20% growth rates for these companies. Consider one top holding, Navigant Consulting (NCI). Its financial-claims arm will perk up as bankruptcy claims do, and a utility consulting unit will benefit from mergers and acquisitions in the energy field. "There's going to be a lot of work for these guys," says co-manager Eric J. Miller, who notched up a 5.4% gain this year, while a sister fund with fewer stocks, Heartland Value Plus Fund, is up 8%.

Even former highfliers hope to improve returns by now playing it safe. Take a look at the H&Q IPO & Emerging Company Fund, which closed to new investors within weeks of its 1999 launch amidst a rush of new cash. The fund lost 49% last year and an additional 24.5% since January. Management has since shifted gears: Holdings include Met Life (MET), John Hancock Financial Services (JHF), Monsanto (MON), and United Parcel Service (UPS). Peter B. Doyle's Kinetics Internet Fund is down 3.8% this year after shunning "what the rest of the world was doing. A lot of things people were buying were thin air." The Kinetics Internet Fund had boffo 216% returns in 1999 chasing the dot-com revolution, but lost 50% last year. Doyle now buys the likes of tech and media giants LibertyMedia Corp. (LMG.A) and AOL Time Warner (AOL).

Meanwhile, bond funds continue to shine. Not only have they provided shelter from a rocky market but high yields and capital appreciation are part of the equation, too. Don't be fooled by comparing the single-digit returns in the accompanying table with what you get in a money-market fund; these are only three-month returns. Long bonds invested in U.S. Treasuries (all maturities) are up a healthy 2.73%, followed by a 4% gain in high-yield, or "junk" bond funds, which are the best of breed in the fixed-income funds.

"With the Fed set to lower rates at least two more times this year, bonds should benefit and continue to show positive returns for the year," says George Strickland of Thornburg Muni Bond Funds. "With money markets likely to return a paltry 4% later this year, tax-free bonds become even more attractive." But investors should not expect the capital appreciation they've gotten over the past year. Says PIMCO's McCulley: "Bonds have been huge performers, but they're already fully valued to a 4% Federal Funds rate. You don't have a lot more upside."

Don't worry about missing an upside move in the stock market. Instead, you should be concerned about exposure on the downside. After all, you don't want folks calling you a DBP--a diehard bull-market patsy. By Mara Der Hovanesian


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