Hang around long enough, and eventually everything comes back: bellbottom pants, swing dancing, huge vehicles, Dick Clark. In 1999, even a few mutual fund types came back around that had seemed about as primed for resurgence as Boy George or the Model T.
"Waiting For Small Caps? Bring A Good Book," smirked The New York Times last March. Indeed it had come to feel more like waiting for Godot - until autumn, when small-company growth stocks went on a tear that continued through the end of the year. Owners of small-cap growth funds, which registered gains in all but eight of the 52 trading sessions from Jack-o'-lantern season to Christmastime, couldn't help but smirk back.
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So, What Have You Done For Me Lately? Here's how 1998's top mutual funds performed in 1999. In the percentile rankings, 1 represents the top 1% and 100 the bottom 1%. The S&P 500 returned 28.6% in 1998 and 21.04% in 1999, and the Lehman Bros. corporate/government bond index returned 9.5% and -0.83%, respectively.
|
Category |
Fund |
Return
in '98
|
Return
in '99
|
Percentile
in '99
|
|
|
Growth |
ProFunds UltraOTC Inv |
185.31% |
233.25% |
1 |
|
Blend |
Schroder Micro Cap Inv |
63.05% |
94.92% |
3 |
|
Specialty |
Internet |
196.14% |
216.44% |
6 |
|
International Stock |
Matthews Korea I |
96.15% |
108.01% |
6 |
|
International Bond |
Vontobel Eastern European Bond |
24.54% |
-9.01% |
91 |
|
Hybrid |
Eastcliff Total Return |
38.69% |
25.12% |
76 |
|
Municipal Bond |
CitiFunds National Tax-Free Income |
10.05% |
-3.86% |
29 |
|
Government Bond |
American Cent-Benham Tgt Mat 2025 Inv |
21.93% |
-20.90% |
97 |
|
Convertible Bond |
Nicholas-Apple Convertible I |
21.54% |
51.51% |
8 |
|
Corporate Bond |
BT Investment Lifecycle Short Range |
13.53% |
3.27% |
77 |
|
Corporate Bond-High Yield |
Strong Short-Term High-Yield Bond |
8.37% |
5.32% |
38 |
|
Value |
Legg Mason Value Nav |
49.40% |
27.99% |
2 |
|
Source: Morningstar Mutual Funds | |
|
HyBRID |
Growth |
Value |
Montgomery Global Long-Short
800-572-3863
1999 return: 135.07%
Category avg. return (827 funds) 9.96%
Playing heavily on long-term growth areas such as technology, telecommunications, media, and health care was last year's winning formula and a strategy to carry on into 2000, says spokesman Pete Greenley. The volatility that could result from concentrating in certain sectors was curbed by shorting other stocks in industries seen as weaker or lacking market share, he explains. The fund's mandate permits seeking opportunities in emerging markets, an area that portfolio managers duly exploited during 1999 and which contributed to the fund's overall success.
Portfolio manager: Kukacka/Jim?nez
Manager's tenure: 3 years
Fund inception: December 1997
Minimum initial investment: Closed
Load: none
12(b)-1 fee: 0.25%
Net assets: $346.1 million
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 36.9
P/B ratio: 8.5
Median market cap: $4.99 billion
Expense ratio: 2.35%
Turnover: -
3-year alpha: NA
3-year beta: NA
3-year r-squared: NA
3-year standard deviation: NA
1998 return: 53.39%
3-year annualized return: NA
|
MAS Small Cap Growth Instl.
800-354-8185
1999 return: 313.91%
Category avg. return (1,410 funds) 51%
Schizophrenia seems to have worked well for this fund, which splits its holdings between steadily growing consumer services companies and skyrocketing technology stocks. "We're less volatile than some aggressive growth funds because we complement our aggressive growth with some stable growers," says manager David Chu. He looks for companies with free cash flow to funnel into new products or markets. Brand-new in 1998, this small fund has been hitching rides with IPOs to great returns. As the fund grows, however, IPOs will have less impact on performance, Chu admits.
Portfolio manager: Armstrong/Chu/Chulik
Manager's tenure: 2 years
Fund inception: June 1998
Minimum initial investment: $5,000,000
Load: none
12(b)-1 fee: none
Net assets: $195.8 million
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 37.4
P/B ratio: 9.7
Median market cap: $1.37 billion
Expense ratio: 1.15%
Turnover: -
3-year alpha: NA
3-year beta: NA
3-year r-squared: NA
3-year standard deviation: NA
1998 return: NA
3-year annualized return: NA
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Al Frank
888-263-6443
1999 return: 60.42%
Category avg. return (1,121 funds) 6.2%
In a fund universe of more than 1000 value funds, the Al Frank Fund stands out. Its heavy technology concentration has given it a return of 60.42%, ten times the average value fund return of 6.26% and better than the S&P's 39.38%. But, says John Buckingham, co-manager of the fund, "We're not just a technology fund. It was superior stock selection, in all humility. We were focusing on what was on our buy list at the time. Had it been steel, you wouldn't be talking to me." But, he adds confidently, "Maybe next year you'll be talking to me again - because of steel."
Portfolio manager: Frank/Buckingham
Manager's tenure: 2 years
Fund inception: January 1998
Minimum initial investment: $5,000
Load: none
12(b)-1 fee: 0.25%
Net assets: $7.6 million
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 27.1
P/B ratio: 2.8
Median market cap: $489 million
Expense ratio: -
Turnover: -
3-year alpha: NA
3-year beta: NA
3-year r-squared: NA
3-year standard deviation: NA
1998 return: -9.30%
3-year annualized return: NA
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The other whipping boy of the asset allocation intelligentsia, internationals, had a similar fate. In April, Forbes wrote, "It's so very tempting to buy Japanese stocks . . . [but] you could be in for a long wait to make money." That wait turned out not to be so long, either. The land of the rising sun became the land of rising returns in 1999, churning out gains of more than 120% for the year. Top performers nearly tripled that average.
A year ago, many investors wouldn't touch anything that said "small cap," "Japan," or "emerging markets" with a 10-foot pole, and some advisors were questioning whether small caps even had a role in an allocated portfolio. Today, the hesitant are kicking themselves, and advisors who stayed in the game - and hung on to their asset allocation pie charts - can afford to give themselves a pat on the back. Diversification, once again, has paid off handsomely.
|
Blend |
International Stock |
Specialty Stock |
Van Wagoner Emerging Growth
800-228-2121
1999 return: 291.15%
Category avg. return (1,431 funds) 19.4%
The secret to this small-blend fund's top ranking was primarily its tight focus on emerging growth - and, as Van Wagoner Managing Director Peter Kris notes, a strong management team. That's not hype. More than 97% of the companies that the fund's analysts picked in 1999 either met or exceeded expectations. Targeting emerging growth led the fund to certain hot sectors, namely technology, semiconductors, internet infrastructure, and telecommunications. "You really have to take a rifle approach because valuations are at all-time highs right now," says Kris.
Portfolio manager: Garrett Van Wagoner
Manager's tenure: 5 years
Fund inception: December 1995
Minimum initial investment: $1,000
Load: none
12(b)-1 fee: 0.17%
Net assets: $1.33 billion
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 41.9
P/B ratio: 11.9
Median market cap: $758 million
Expense ratio: 1.95%
Turnover: 668%
3-year alpha: 16.89
3-year beta: 1.41
3-year r-squared: 29
3-year standard deviation: 70.78
1998 return: 7.98%
3-year annualized return: 50.05
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Warburg Pincus Adv Japan Sm
(800) 927-2874
1999 return: 329.68%
Category avg. return (1,532 funds) 50.9%
"I am the most experienced Japan portfolio manager in the world," says manager Nicholas Edwards. Modesty may not be his strong point, but with a fund that nearly tripled the already triple-digit average for Japanese stock funds, one can hardly blame him. "Economic recovery in Japan provided a backdrop for the success of companies involved in restructuring and benefiting from the new economy," says Edwards. That meant good things for telecommunications, the Internet, software, brokerages, and specialty retailers. Edwards owned some of each and reaped the rewards.
Portfolio manager: Edwards/Jacobson
Manager's tenure: 2 years
Fund inception: September 1994
Minimum initial investment: $0
Load: none
12(b)-1 fee: 0.75%
Net assets: $7.5 million
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 56.0
P/B ratio: 2.4
Median market cap: $10.4 billion
Expense ratio: 2.01%
Turnover: 113%
3-year alpha: 41.06
3-year beta: 0.42
3-year r-squared: 4
3-year standard deviation: 54.37
1998 return: 12.76%
3-year annualized return: 52.94%
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Nicholas-Applegate Global Tech I
800-551-8643
1999 return: 493.73%
Category avg. return (573 funds) 32.4%
We tried to find out the secret of this specialty stock fund's success, but were unable to connect with the fund managers; they're granting only, ahem, "limited interviews." Clients will need a hefty investment to join this profitable fund or an advisor who aggregates assets under management, since the initial investment is $250,000. It could be worth it, though. The fund's 75.9% concentration in technology stocks has shot through the roof, posting fund returns for last year of nearly 500%. And there may be room for more investors; net assets are at $129.4 million.
Portfolio manager: Management team
Manager's tenure: 2 years
Fund inception: July 1998
Minimum initial investment: $250,000
Load: none
12(b)-1 fee: none
Net assets: $129.4 million
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 55.8
P/B ratio: 16.3
Median market cap: $11.4 billion
Expense ratio: 1.43%
Turnover: NA
3-year alpha: NA
3-year beta: NA
3-year r-squared: NA
3-year standard deviation: NA
1998 return: NA
3-year annualized return: NA
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"If I always knew the right place to be and the right time to be there, then yes, diversification is dumb," says Harold Evensky, a CFP from Coral Gables, Florida. "But if I knew that, I wouldn't need clients."
After moving into small international stocks about three years ago, Libby Mihalka, a planner from Livermore, California, is finally reaping the benefits. She credits careful research for the initial move. ("That means reading things with equations in them and not getting freaked out," she says with a laugh.) Noticing that many successful international funds started out owning small- and medium-sized companies, and were then forced to switch to larger ones when the fund itself got too big, she turned her attention to small-cap international funds and proceeded to wait. Last year, her patience was rewarded. But buying a few foreign funds doesn't necessarily mean you're truly diversified internationally, Mihalka emphasizes. "People work so hard at being diversified by size domestically - large cap, small cap, mid cap, but many only buy large-cap international funds," she says. "Why not split international holdings by size, too?"
|
Municipal Bond |
Convertible Bond |
International Bond |
Colorado BondShares
800-572-0069
1999 return: 3.31%
Category avg. return (1,824 funds) -3.8%
Consisting primarily of non-rated Colorado bonds, this fund owes its top ranking to more than a vital local economy, reports manager Fred Kelly, Jr. In 1999, virtually all the fund's credits grew stronger, which, since credit risk is greater than market risk, worked to the fund's advantage. Historically, this fund has grabbed smaller, lesser known credits and waited for them to grow, be recognized by the marketplace, and receive a favorable rating on their own merits. Typically a long bond fund, the fund carried one of the nation's shorter durations and average maturities last year.
Portfolio manager: Fred R. Kelly Jr.
Manager's tenure: 10 years
Fund inception: June 1987
Minimum initial investment: $500
Load: 4.75%
12(b)-1 fee: none
Net assets: $75.0 million
Dist. yield (trailing 12 months): 6.10%
P/E ratio: NA
P/B ratio: NA
Median market cap: -
Expense ratio: 0.66%
Turnover: 29%
3-year alpha: 1.08
3-year beta: 0.24
3-year r-squared: 38
3-year standard deviation: 1.33
1998 return: 6.35%
3-year annualized return: 6.36%
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Ariston Convertible Secs.
888-387-2273
1999 return: 94.6%
Category avg. return (56 funds) 29.6%
This tech-heavy fund has ridden the crest of the technology wave, but manager Richard Russell never gets on board without his life jacket. "Yes, we buy into companies that are generally far more volatile than the market averages, but we reduce that volatility by buying convertibles," says Russell. "We're not saying that we're a low risk investment, though; we're saying that the risk is lower than it would be if we bought the straight common stock." The fund's performance got a boost from several mid cap holdings that swelled to large cap size in 1999.
Portfolio manager: Richard B. Russell
Manager's tenure: 12 years
Fund inception: January 1988
Minimum initial investment: $1,000
Load: none
12(b)-1 fee: 0.25%
Net assets: $9.4 million
Dist. yield (trailing 12 months): 0.00%
P/E ratio: 26.8
P/B ratio: 2.0
Median market cap: $1.67 billion
Expense ratio: 2.32%
Turnover: 28%
3-year alpha: 4.77
3-year beta: 0.99
3-year r-squared: 39
3-year standard deviation: 34.89
1998 return: 2.09%
3-year annualized return: 31.00%
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Phoenix-Goodwin Emerging Bd A
800-243-4361
1999 return: 40.05%
Category avg. return (240 funds) 2.56%
Fund manager Peter Lannigan is, in his own words, a fundamental investor. "I assess the fundamental economic and political profiles of the countries I invest in. I invest more heavily in countries I think are improving and more lightly in those I think are deteriorating," he says. This approach, with heavy concentrations in Russia and Venezuela, led to returns way ahead of the pack. "I have a strong degree of conviction in my economic and political assessments of a country. If market action causes prices to deviate from my fundamental assessment, that's when I buy."
Portfolio manager: Peter Lannigan
Manager's tenure: 5 years
Fund started: September 1995
Minimum initial investment: $500
Load: 4.75%
12(b)-1 fee: 0.25%
Net assets: $54.9 million
Dist. yield (trailing 12 months): 13.96%
P/E ratio: 22.7
P/B ratio: 5.1
Median market cap: $6.75 billion
Expense ratio: 1.43%
Turnover: 405%
3-year alpha: 4.16
3-year beta: -1.67
3-year r-squared: 3
3-year standard deviation: 33.57
1998 return: -32.88%
3-year annualized return: 2.25%
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Solid asset allocation means convincing clients to buy or hold onto funds when they are merely puttering along and even dropping. Anyone with clients invested in bonds last year - almost everyone, in other words - had the fun experience of trying to explain why clients' "safe" investments were actually losing money. For instance, American Century Target Mat 2025, the top government bond fund of 1998 with returns of 20%, stumbled out of 1999 with returns of the same percentage - except that this time, it was a negative 20%. CitiFunds National Tax-Free Income, the top performer among municipal bonds, slipped from 10% to nearly -4% in 1999. Not all bond funds fell so far, but very few had much to celebrate. And anyone with clients invested in financial services companies wasn't partying, either. According to CDA/Wiesenberger, the sector that looked so appealing a year ago ended 1999 in the red.
Out-of-favor funds can be a tough sell, particularly when technology funds are screaming past with gazillion percent returns, pulling in money hand over fist. "From the time mutual funds were invented until 1998, only 21 funds ever garnered triple-digit returns," says Ramy Shaalan, a mutual fund analyst at CDA/Wiesenber-ger. "Last year, there were 110 that did." Not surprisingly, many of them owed their success to technology. These blistering returns have been a mixed blessing for advisors. "1999 was a great year for returns. It was not a great year for client education," says Evensky. "People are confusing luck with brains." Evensky says he congratulates his clients who do well playing with Internet stocks and funds, but he advises them to treat their "win" like a lottery win: Don't expect it to happen again. He also worries that clients are getting the mistaken impression that fund expenses are irrelevant. After all, when you're raking in 115%, the difference between 1% and 2% in expenses is peanuts, right?
Mihalka, with many clients from Silicon Valley, can't exactly shun the technology sector, but she is careful. "I don't believe in betting the whole house. But I don't believe in not participating in something just because it isn't what people have done before, either." For the moment, her greatest concern is day trading and the IPO market, where stocks go public at $17, make their first transaction at $55, and close for the day at $270. "It's crazy," she says. The worst part about these stratospheric numbers, says Evensky, is that clients calibrate their expectations retroactively to whatever was hottest that year. They forget that asset allocation is about earning good returns and avoiding risk. The very top performers become the new benchmarks to which they compare their returns - an exercise that could make only the clairvoyant look smart.
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Corporate Bond |
High-Yield Bond |
Government Bond |
MSDW Strategic Adviser Cons A
800-548-7786
1999 return: 8.13%
Category avg. return (940 funds) -0.41%
While this fund finished '99 as top dog in our general corporate bond category, manager Francine Bovich notes the fund is strictly short-term with the primary objective of capital preservation - fixed-income with a growth orientation through U.S. equities. What helped last year, says MSDW Vice President Que Nguyen, was a concentration of growth stocks in the fund's stock allocation and a bond selection favoring international and high-yield holdings. The fund had small holdings in emerging market debt to give it some yield as interest rates were rising in the U.S., Nguyen notes.
Portfolio manager: Francine Bovich
Manager's tenure: 3 years
Fund inception: December 1997
Minimum initial investment: $500,000
Load: none
12(b)-1 fee: none
Net assets: NA
Dist. yield (trailing 12 months): 7.39%
P/E ratio: NA
P/B ratio: NA
Median market cap: NA
Expense ratio: NA
Turnover: NA
3-year alpha: NA
3-year beta: NA
3-year r-squared: NA
3-year standard deviation: NA
1998 return: 7.87%
3-year annualized return: NA
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Third Avenue High-Yield
800-443-1021
1999 return: 27.37%
Category avg. return (320 funds) 4.19%
Anyone starting to see a theme here? This fund chalks up much of its success to - surprise, surprise! - technology. Manager Margaret Patel isn't concerned about spreading the wealth; she wants to be where the action is. "Many high-yield funds have north of 150 holdings, with exposure in virtually all the industries. They try to replicate the high-yield universe," she says. "But if you think a sector is going to outperform, you should concentrate assets in that sector enough to have an impact on performance." Patel will continue managing the fund after its name changes to Pioneer this month.
Portfolio manager: Margaret D. Patel
Manager's tenure: 2 years
Fund inception: February 1998
Minimum initial investment: $1,000
Load: none
12(b)-1 fee: none
Net assets: $8.1 million
Dist. yield (trailing 12 months): 6.69%
P/E ratio: NA
P/B ratio: NA
Median market cap: NA
Expense ratio: 1.90%
Turnover: NA
3-year alpha: NA
3-year beta: NA
3-year r-squared: NA
3-year standard deviation: NA
1998 return: NA
3-year annualized return: NA
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Rydex Juno
800-820-0888
1999 return: 20.36%
Category avg. return (529 funds) -1.00%
Rydex's Juno Fund is a passively managed index fund designed to move inversely to the price of the 30-year Treasury bond. "It's a short fund," says manager Mike Byrum, "a hedge against climbing interest rates." The fund does not make directional bets on the market or on interest rates, but instead sells short Treasury bond futures, according to Byrum. The strategy has worked admirably, considering that in a universe of more than 500 government bond funds, the average rate of return for the year was -1%, and Juno garnered a whopping 20.36% for the same period.
Portfolio manager: Management Team
Manager's tenure: 2 years
Fund inception: March 1995
Minimum initial investment: $25,000
Load: none
12(b)-1 fee: none
Net assets: $18.9 million
Dist. yield (trailing 12 months): 0.17%
P/E ratio: NA
P/B ratio: NA
Median market cap: NA
Expense ratio: 1.57%
Turnover: NA
3-year alpha: -0.45
3-year beta: -2.22
3-year r-squared: 92
3-year standard deviation: 7.55
1998 return: -4.58%
3-year annualized return: 2.74
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For clients toting their "Super Duper Top Funds List!", a little history can be instructive. American Heritage Fund, the top growth fund of 1997 with a return of 75%, lost more than 60% of its value in 1998. The top blend fund of 1997, Hartford Capital Appreciation B, traded its '97 return of 54% for a dinky increase of 2.5% the next year. And so on down the line.
One year's hotshots typically falter the following year. Though not unheard of, spectacular encores are rare.
Why? In some cases, it comes from too much of a good thing. A fund finds money flooding in once its success is recognized, and the fund managers can't find enough good places to invest it fast enough to keep performance cooking along. This can be particularly true of funds investing in small companies. Managers can't purchase million-dollar chunks of a company ad infinitum when the company is worth only $10 million - and what they do buy will push up the price of thinly traded shares. Eventually, the managers will have to find other places to put their money. And if they have to find them right away, their choices may not be as thoughtful and well-considered as were the initial decisions that brought them success.
In most cases, however, the primary culprit of a good fund gone sour is simply the ebb and flow of the markets. "The simple answer is that the market is cyclical," says Evensky. "The tendency of things over time is to revert to the mean." Which means that the winners will eventually slip, and the losers will, if not win, at least climb out of the basement.
"There's no way of telling when any one sector is going to go out of favor," says Shaalan. "To deal with this, people should allocate their money in different areas to capitalize on opportunity and manage risk." Though strategies and theories abound, there is no foolproof way to be certain that any sector, index, stock, or fund is going to go up or down in any given period of time. Until it is possible to predict the future, asset allocation remains a pretty good idea. And for anyone who was still listening, the events of 1999 shouted home the point.
"You have to be careful that you don't own too much where the party is going on," says Mihalka, "because sooner or later, the party's going to be over."
