Advertisement
YOU ARE HERE: LAT HomeCollections

MUTUAL FUNDS / RUSS WILES

Going Against Conventional Wisdom Can Pay Off

December 17, 1995|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds

Most seasoned investors probably heed the conventional wisdom that it's not a good idea to sink a lot of money into any mutual fund that finishes at the top of the yearly performance list.

Hot funds must assume big risks to beat out the competition, the reasoning goes. Plus, success often alters the very nature of a fund, as assets swell beyond a workable level and feelings of invincibility fill the manager's head.

So it's with some trepidation that I report on a year-end investment strategy that not only flies against the conventional wisdom but appears to work. The strategy involves buying this year's top-performing no-load diversified fund and holding it through all of 1996. Then, you would sell that portfolio at year-end and switch to the new reigning champ.

A person who followed this approach from January 1976 through December 1994 would have earned a 23.2% annual return over that period, says Sheldon Jacobs, publisher of The No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y. That compares with a 14% yearly gain for the typical diversified no-load portfolio.

Looked at another way, the annual top-dog fund beat rival portfolios on average in 14 of those 19 years, with one tie. The scorecard probably will soon change to 15 wins in 20 years, because 1994's top fund, PBHG Emerging Growth, has performed much better than the norm through the first 11 months of 1995.

So why does this unlikely strategy work? Jacobs thinks its essence can be boiled down to a few key points:

* Diversified funds are more reliable. These portfolios--which invest in several industries--generally continue to be superior performers because of management consistency and other factors, Jacobs says. Conversely, industry-specific "sector" funds are much more erratic.

* It's less costly to make switches using no-load funds. By contrast, front- or back-end charges would eat up much of the returns on broker-sold funds held only for just a year.

* A one-year period is a good span by which to gauge performance. This last point challenges the conventional wisdom that fund performance is best judged over periods of three, five or even 10 years.

"Most people look at three or five years, and I do too on many occasions," he says. "But with one year, there's a better chance that [trends] in the market that boosted a fund will continue longer."

For example, technology stocks tend to run hot or cold for about three years at a time, Jacobs says, so it makes more sense to buy a fund laden with tech stocks after one year rather than three.

Investing on the basis of one-year results has received support from other corners, too. For example, in his book "Bogle on Mutual Funds" (Irwin, $25), Vanguard Group Chairman John C. Bogle examined the returns of top funds over various periods and found that top-performing portfolios placed well above average in the following year, too. Still, Bogle noted that top performers tended to "regress to the mean" after their championship season.

It's obviously premature to implement this type of strategy before year-end: in 1994, PBHG Emerging Growth displaced Robertson Stephens Value & Growth during the final days of the year, says Jacobs.

But it's not necessarily too early to start collecting prospectuses from the championship contenders.

For the year to date through Nov. 30, Wasatch Mid-Cap of Salt Lake City held the lead among diversified no-load funds with a gain of 58.4%. It's one of the funds in the group headed by Samuel S. Stewart Jr., a University of Utah business professor who was profiled in this column in October 1994. The fund's Nov. 30 per-share price was $18.44.

Barring a late-December collapse, other funds likely to make a run for the crown include 1994's bridesmaid, Robertson Stephens Value & Growth (up 55.4%; Nov. 30 price of $24.68; [800] 766-3863), T. Rowe Price New Horizons (up 50.8%; price of $22.26; [800] 638-5660) and Fidelity New Millenium (up 50%; price of $18.10; [800] 544-8888).

Longshots include Twentieth Century Vista (up 49.2%; [800] 345-2021), USAA Aggressive Growth (up 49%, [800] 382-8722) and IAI Emerging Growth (up 48.5%; [800] 945-3863).

If you decide to try this strategy, commit to follow it for several years and don't risk more than 5% or so of your cash, suggests Jacobs. A special caveat applies now since so many high-flying diversified funds have loaded up on technology stocks.

"It's always a high-risk strategy in the short run," says Jacobs. "And this year it carries more risk than ever."

Advertisement
Los Angeles Times Articles
|
|
|