You're researching mutual funds for your clients and, quite understandably, you have a look at the funds that turned in the best results during 2000. Many of them have been winning plaudits from CNBC or consumer financial magazines or Web sites, after all, and you want to see for yourself what's really going on.
Then you pause for a minute and turn back to the funds that led the pack in 1999. Investment Advisor tracks 12 fund categories every month, from growth to high-yield corporate debt. Of 1999's 12 winners, seven turned in seriously negative numbers last year. Of the remainder, not one equity fund beat the Standard & Poor's 500 Index last year. On the other hand, all six of last year's top fixed-income funds came out ahead of Lehman Brothers' Aggregate Bond Index. Of the 12 funds we profiled in 2000, by the way (see table, page 62), eight of the equity funds beat the S&P 500 and six of them recorded positive total returns.
But will last year's hot performers continue their outperformance over the following 12 months?
Don't forget Bill Miller, the fabled manager of Legg Mason Value Trust, who has beaten the S&P for 10 years running--even in the very demanding 2000 market. But Miller is more the exception than the rule.
You always have to ask why a fund did so well in the previous year. Was its outperformance due to managerial acumen, or simply to being in the right place at the right time? Take, for example, Nicholas-Applegate Global Technology. It ran up an incredible 494% in 1999, largely due to its move into the once-vibrant Internet stock sector. But last year, as Net stocks imploded, the fund fell back to earth with a thud, registering a 36% loss.
The same fortune may await some of 2000's big winners. Lord Abbett Mid-Cap Value A, for one, took the gold medal in our Value category last year by being in four areas that proved to be hot.As Wall Street's big money rotated out of big cap growth stocks, value and mid caps came into the sunlight for the first time in years. Managers Edward von der Linde and Howard E. Hansen gave the fund an extra fillip with their timely bets on energy and utility issues.
But many utilities have been waning lately, even amid falling interest rates, in the face of California's electricity crisis. And if the Federal Reserve's interest-rate cuts rekindle the faltering United States economy, how long will it be before money managers start shifting back to larger growth stocks to catch the wave of a broad-based economic recovery?
Speaking of falling rates, American Century Target Maturity 2025 fund surged 32% in 2000 as its portfolio, largely composed of U.S. Treasury STRIPS, benefited from the slowing economy and expectations of lower borrowing costs.
But how long will rates continue to fall? With 10-year Treasuries already trading around a rock-bottom 5%, room for further declines, and, thus, for capital gains, may be limited.
The bottom line for screening funds is "take the broad view." When poring over historical results, you need to look at more than results. Check out the fund's style consistency. Did that small-cap growth fund you were considering for your client's asset allocation plan, for example, stick to its knitting? Or has it swung back and forth between value and growth over the years? Morningstar, Standard & Poor's, and other fund data sources have tools you can use to check whether a mutual fund is sticking to its stated sector. For a disciplined investor, style consistency can be a lot more important than one year's results.
Here's another question: Did the fund mind its investors' pocketbooks? One manager who does is Margaret D. Patel at Pioneer High Yield A. She racked up a nearly 13% total return last year, after gaining 17% in 1999. But she keeps her fund's expenses down to a slim 0.95%, even though she's investing in a volatile sector that requires extensive, and expensive, legwork.
|The Highest Fliers in 2000|
Here are the top mutual funds for 2000, as determined by total return, in twelve different Morningstar categories. In the percentile rankings, 1 represents the top 1% and 100 the bottom 1% of all funds in the category. By way of comparison, the S&P 500 returned 21.04% in 1999, and -9.1% in 2000, while the Lehman Bros. Aggregate Bond Index returned |
-0.83% in 1999, and 11.6% in 2000.
|Category||Fund||Return in '00||Return in '99||
|Hybrid||Boston Partners Long/Short Eq Is (BPLEX)||60.20%||-14.30%||1||N/A|
|Growth||American Eagle Capital Appreciation (AECAX)||84.67%||N/A||1||N/A|
|Value||Lord Abbett Mid-Cap Value A (LAVLX)||53.30%||4.24%||1||14|
|Blend||Franklin U.S. Long/Short (FUSLX)||55.08%||N/A||1||N/A|
|International Stock||Deutsche European Equity Instl (MEUEX)||96.70%||45.40%||1||1|
|Specialty||Evergreen Health Care A (EHABX)||119.05%||N/A||2||N/A|
|Municipal Bond||SAFECO CA Tax-Free Income (SCXAX)||18.75%||-9.42%||1||34|
|Convertible Bond||Franklin Convertible Securities A (FISCX)||15.36%||21.15%||1||45|
|Corporate Bond-General||Vanguard Long-Term Bond Index (VBLTX)||16.63%||-7.85%||1||5|
|Corporate Bond-High Yield||Pioneer High Yield (TAHYX)||12.81%||27.30%||1||N/A|
|Government Bond||American Cent Target Mat 2025 Inv (BTTRX)||32.05%||-20.90%||1||1|
|International Bond||Deutsche Emerging Markets Debt Instl (MGEIX)||18.71%||28.40%||5||58|
Lo, How the Mighty Have Fallen
|Here's how the top mutual funds of 1999 failed to perform in 2000, as determined by total return, in twelve different Morningstar categories. In the percentile rankings, 1 represents the top 1% and 100 the bottom 1% of all funds in the category. The S&P 500 returned 21.04% in 1999, and -9.1% in 2000, while the Lehman Bros. Aggregate Bond Index returned -0.83% in 1999, and 11.6% in 2000.|
|Category||Fund||Return in '00||Return in '99||
|Hybrid||Montgomery Global Long/Short R (MNGLX)||135.07%||-24.33%||95||1|
|Growth||MAS Small-Cap Growth Instl (MSCGX)||313.91%||-18.96%||85||N/A|
|Value||Al Frank (VALUX)||60.42%||7.13%||85||6|
|Blend||Van Wagoner Emerging Growth (VWEGX)||291.15%||-20.90%||79||1|
|International Stock||Warburg Pincus Adv Japan Small (WJSAX)||329.68%||-72.09%||99||38|
|Specialty||Nicholas-Applegate Global Tech I (NGTIX)||493.73%||-36.37%||58||N/A|
|Municipal Bond||Colorado Bond Shares (HICOX)||3.31%||7.55%||86||1|
|Convertible Bond||Ariston Convertible Securities (CNCVX)||94.60%||-14.76%||97||10|
|Corporate Bond-General||MSDW Strategic Adviser Cons A (MS-BAHD)||8.13%||2.66%||99||8|
|Corporate Bond-High Yield||Third Avenue High-Yield (TAJUX)||27.37%||20.76%||38||10|
|Government Bond||Rydex Juno (RYJUX)||20.36%||-13.75%||100||100|
|International Bond||Phoenix-Goodwin Emerging Bond (PEMAX)||40.05%||1.12%||84||61|
|Source: January 2001 Morningstar Principia Pro|
Indeed, fund expenses may be the one thing you have to pay attention to the most. A recent Morningstar Inc. study notes that while the average actively managed large cap equity fund offers better protection than competing index funds during bear markets, low-cost indexing still outperforms more costly active management over the long haul. "It's tough to go wrong by indexing large caps," observed Susan Dzubinski, editor of Morningstar FundInvestor. "If actively managed funds cut their fees, they'd automatically be more competitive."
To be sure, active managers do a little better than indexers in some sectors, including small cap and international equities. But costs should always be your guide--whether you're considering last year's hot fund or not.