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Mutual Funds: THIRD-QUARTER REVIEW FOR INVESTORS : JUMPING SHIP : Under-Performance Angst ? A Few Things to Consider

October 02, 1994|TOM PETRUNO

Will stock mutual fund investors sit still for sub-par returns? Should they?

The experience of many growth funds that target big-name consumer stocks, many of which have stagnated since 1991, is that the majority of investors stay put.

Assets of Vanguard's U.S. Growth Fund, for example, are near a record high even though the fund has barely advanced since '91.

Naturally, many fund owners have invested for retirement and know that stocks perform better than any other major investment long-term. So holding on through bad times seems logical enough.

But inertia also plays a big role, experts say. "It's psychological," says Avi Nachmany, analyst at fund research firm Strategic Insight in New York. "Nobody wants to tell their spouse: 'I made a mistake. Let's sell.' "

What's more, Nachmany says, fund performance so far in the 1990s has been mediocre at worst. There has yet to be a drawn-out, deep bear market that leaves stock funds far in the red. That will be a much greater test for investors.

Of course, some investors have already lost patience. Assets of the Twentieth Century Growth fund, for example, peaked at $5 billion in February, 1993. Today, after three dull years, the fund holds $4.2 billion, and only a small part of that decline is market depreciation.

Chris Boyd, co-manager of the fund, says that despite a "sobering" few years for growth-stock investors, "eventually stock prices will follow earnings" higher. Noting the fund's superior returns over its 36-year history, Boyd says, "I have every confidence that we can outperform (the market average) over any long period of time."

"You shouldn't be disappointed if you have a few mediocre years," says Don Phillips at fund research firm Morningstar Inc. Various investing styles, such as growth-stock investing, periodically wane, then roar back, he notes.

The important question is whether your fund consistently under-performs its peers in both bull and bear market phases. If that has been the case for five or six years, then the decision to sell and find a better fund should be much easier, Phillips says.

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