And The Winners Are...Jeffrey M. Laderman
Julian A. Lerner launched the Charter Fund in 1968 with a dream that it would one day have a $25 million portfolio. But the fund nearly folded during the 1970 bear market, and for many years, a strong record didn't prevent investors from pulling more money out than they put in. Even at the end of the roaring '80s, Lerner's fund remained a pip-squeak in a world of giants, with only $77 million under management.
Then came the avalanche. In 1990, AIM Charter, as the fund is now known, made money when most funds didn't and caught the eye of investors. By the end of 1990, AIM Charter had $122.9 million in assets. In 1991's bull market, Lerner chalked up a 37.8% total return. Now, the fund is more than $650 million, and cash is still coming in at a rate of $3.5 million a day.
CASH FLOW. Lerner has plenty of company. In December alone, new money flowing into equity mutual funds totaled $7.4 billion, easily beating the previous record of $5.9 billion set in January, 1987. And the buying binge is not over. By most counts, January mutual-fund sales--to be reported the last week of February--will far exceed December's.
The deluge of dollars is widespread. Twentieth Century Funds, for instance, is taking in about $20 million a day. The Kansas City (Mo.)-based fund-management company took 32 years to get $8 billion in assets--and just one more year to double, to nearly $16 billion. The top-performing Kemper Growth Fund is now drawing in $4.5 million a day, vs. about $600,000 a year ago.
It's easy to explain the buying frenzy. Interest rates are at the lowest level in a generation, and returns on certificates of deposit and money-market funds are paltry. Just as important, 1991 was a stellar year for stocks, and the average diversified fund handily beat the market, delivering a spectacular 37.3% total return, vs. 30.4% for the Standard & Poor's 500-stock index (table, page 38).
Health care funds shot out the lights, up 78.3%. That's the third year in a row that such funds led the mutual-fund performance derby. They invest in everything from major drug companies such as Merck, Glaxo, and Pfizer down to speculative biotechnology startups. The Oppenheimer Global Bio-Tech Fund delivered the year's highest returns, up 121.1%. Health care stocks contributed to the success of diversified funds, too.
But investors didn't have to own health care funds to make a bundle. Tumbling interest rates improved the prospects for financial-services companies, so their stocks--and the mutual funds that invest in them--soared. Technology funds gained 49.3%, even while big computer stocks such as IBM and Digital Equipment Corp. languished. Most important, funds that invest in small companies blossomed with an average 51.5% return.
Can mutual funds keep up these supersonic returns? Don't look for 30% every year--or even 20%. During the 1980s, equity funds delivered about 15% a year, on average, and that was considered hot stuff. The long-term average return from equities is 10.4% a year.
But by investing judiciously in the right funds, mutual-fund investors don't have to settle for average. That's why we bring you the 1992 BUSINESS WEEK Mutual Fund Scoreboard. To aid your fund search, we are adding 130 funds, bringing the total to 760.
STEADY SUCCESS. The scoreboard is a trove of funds' vital statistics: returns for the last year and, where available, for the last 3, 5, and 10 years; sales charges and expense ratios; and portfolio data such as price-earnings ratio, largest holdings, and risk. To help you find the best funds, we measure returns for the last five years, adjust them for risk, and assign ratings. This year, 41 funds earned three upward-pointing arrows, BUSINESS WEEK's highest accolade (table).
Some of the best funds share portfolio managers. AIM Charter's Lerner, for instance, also runs Olympus Stock Fund. The Janus and Janus Venture funds are managed by James P. Craig. John Kaweske runs two strikingly different winners: the conservative Financial Industrial Income and the high-flying Financial Strategic Health Sciences.
Kaweske's health care portfolio earned a 36.7% average annual return over the last five years and a staggering 91.8% in 1991. Six of BW's top-rated funds are health care portfolios.
Don't look for a repeat of 1991's spectacular results, but health care funds will continue to make money for their investors, despite political pressure for national health insurance and cost containment. "If you go to some sort of national health care system, it will increase the demand for services," says Kaweske. "There will be 37 million people not covered by health plans who would be. Health care is still going to be a growth industry."
Investing in growth stocks has been a winning strategy for the past several years, as the recession took its toll on such cyclical industries as autos, chemicals, and paper. That's how the many growth funds--such as AIM Weingarten, Berger 100, IDS New Dimensions, and Twentieth Century Growth--won the highest BUSINESS WEEK ratings. They don't invest in any one industry but search for companies in industries that are not tied to the business cycle.
These diversified funds will likely stick to their traditional growth-stock holdings even when the economy improves. "We're looking for low economic growth and low inflation," says Michael Arends, co-portfolio manager of the Kemper Growth and Kemper Investment Portfolio Growth funds. "In that environment, stocks with steady earnings growth will win out."
Many growth-fund managers spread their money across hundreds of stocks. Not Thomas F. Marsico, who runs the Janus Twenty Fund. He makes big bets. About 75% of his $1.5 billion fund is in just 20 stocks, some of which are BankAmerica, Medco Containment, and Waste Management. "It's really not as risky a strategy as you think," says Marsico, "as long as you're diversified among industries." Marsico also runs two other top-performing funds, IDEX and IDEX II.
At the other end of the spectrum is the Gabelli Asset Fund. Portfolio manager Mario J. Gabelli is a classic "value" buyer, looking beyond a company's reported earnings (or lack thereof) to its intrinsic value--franchises, real estate, cash flow, or other hidden assets. Such a strategy proved to be dynamite in the 1980s, since the takeover binge centered on such "undervalued" companies. Such stocks are often in cyclical businesses, and for that reason, the stocks have been laggards in recent years. An economic recovery will spark funds such as Gabelli Asset.
`LIFE-AFFIRMING.' Somewhere between the extremes of growth and cyclical stocks is Richard Shields's Dreyfus Strategic Investing fund. "I don't see the world as split between growth and value," says Shields. "I buy companies with products that are in demand, enjoy high returns, and work for their shareholders." His holdings include Amgen, Conrail, and Loctite.
The top-performers list also includes Pax World Fund, with modest results--an average annual return of 13.8% for the last five years--but high ideals. The fund, says Anthony S. Brown, the founder and portfolio manager, "invests in life-affirming companies." Tobacco, defense, alcoholic beverage, and gaming stocks are taboo, as are companies with ties to South Africa. Brown won't buy U.S. Treasury bonds, either, "since the money could be used for the military."
Some funds, such as Pax World, Fidelity Balanced, and Mathers, earn top honors along with the barn-burners even if they don't earn big bucks. The reason: They rarely have a losing year. And a big part of making money over the long haul is not having to make up for periods of big losses.
That's the calling card of the Mathers Fund, which is on the list for the second time. Portfolio manager Henry G. Van der Eb Jr. skirted the 1990 bear market by keeping the portfolio almost entirely in cash and earning a 10.4% return. But, concerned about high stock prices and the debt-laden financial system, he watched the 1991 bull market largely from the sidelines and still has 82% of his assets in one-year Treasuries. Mathers had a relatively scant 9.4% return for 1991 but receives $500,000 to $1 million a day in new money. Says Van der Eb: "Most of our shareholders own other funds and see us as a hedge, sort of an insurance policy."
Unlike Van der Eb, most fund managers are investing their inflow as quickly as they can. Such cash is, in part, what's driving stock prices and, in turn, mutual-fund performance. A fund manager who keeps buying his favorite stocks with new money, in effect, helps to reinforce his success. But at some point, most money managers have to find new investment opportunities. And generally, the larger the fund gets, the harder it is to find enough gems to keep producing fat returns. True, the success of the Fidelity Magellan Fund, with $19.2 billion and 5.3% of all equity-fund assets, has laid to rest the myth that big funds can't earn handsome profits. Still, while Magellan often beats the S&P, it does so by a smaller margin than in earlier years.
Some analysts fear that many new fund investors are stock-market tyros who may bolt at the first sign of trouble. But A. Michael Lipper of Lipper Analytical Services Inc. thinks most of the money is here to stay. "This is patient capital," says Lipper. "People don't really redeem funds except for tuition, retirement, or estate needs." Even in October, 1987, equity-fund redemptions were only $5.9 billion, just 3.2% of assets.
But patient capital should also be smart capital. Markets are volatile, and investors need to build portfolios that will meet their financial goals and still allow them peace of mind. That means selecting a variety of funds. For instance, while international funds--except for the Templeton Foreign Fund--have vanished from the BW top-performers list, most investors could benefit from some non-U.S. investments. Not to many years ago, it was the global funds that left the domestic ones in the dust. It doesn't hurt to have a fund that zigs while others zag. Keep that in mind as you examine the BUSINESS WEEK Mutual Fund Scoreboard.
To get an idea of how the scoreboard works, turn to page 84 and look for the AIM Charter Fund. Note the figure next to the name. That indicates the portfolio manager is an old pro, on the job for more than a decade. Next comes the BW performance rating, with three upward-pointing arrows, the highest rating. The following column, "Objective," is the fund's investment goal. In this case, it's "Growth/income": The fund tries to generate income and capital appreciation.
LOAD OR NO-LOAD. The next two items, "Size" and "Fees," are straightforward. Note that AIM Charter had $586.9 million at yearend 1991, a 377% increase in assets. That wasn't all the result of the manager's prowess. "Current Results" show AIM Charter was up 37.8% in 1991--that's capital appreciation plus reinvestment of dividends and capital gains. So you can surmise most of the asset gain came from new money. AIM Charter is a "load" fund, with a 5.5% sales charge. You don't have to pay a load to invest in all mutual funds. Indeed, the Scoreboard includes 249 no-load funds. Load or no-load, all fund investors pay expenses--management fees, legal fees, administrative costs--and that comes out of the portfolio. In this case, it's 1.29%, or $1.29 for every $100 in the fund. The average is 1.34%.
Now, move to "Rank Within Objective." That tells how AIM Charter's 1991 returns compared with other growth/income funds. In this case, it's pretty good, No.13 out of 116. Go on to the "Trend" column. Each box represents a 2 1/2-year period. The fund was bottom-ranked in the first period but improved its relative standing in each successive period. In the last 30-month period, AIM Charter was in the top 25% of all funds.
Next, look at "Portfolio Data." AIM Charter had 23% of its assets in cash at yearend; clearly, the manager is cautious. The p-e ratio, the next item, is 21.9, which is a bit higher than the average of 20.6. The "Largest Holding," the next column shows, was Pfizer Inc., and that represented 3% of the fund's assets. Finally comes the "Risk," which is "low." That shows it isn't necessary to take big risks to earn big rewards.