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The S&P 500 May Be the Gold Standard, but Not Sole Standard

Investing: In first quarter, many funds beat benchmarks closer to their own category.


The first quarter of 1999 may have seemed like another bitter performance pill for mutual fund investors to swallow.

But it depends on how you measure it.

True, fewer than 25% of all U.S. diversified stock funds managed to beat the benchmark Standard & Poor's 500 index of blue-chip stocks, continuing a frustrating five-year trend that has given the fund industry a PR problem.

And the average domestic stock fund was up just 0.9% for the quarter, versus 5% for the S&P.

But these comparisons to the S&P 500 aren't only unfair, they mask what has actually been a respectable start for stock funds this year, analysts argue.

"When you start applying more appropriate benchmarks, the comparisons look a lot better," said John Rekenthaler, research director for fund tracker Morningstar Inc. in Chicago.

"Now, I'm not saying active managers can declare victory, but when you benchmark correctly, the battles become a lot closer," he added.


* 78% of all mid-cap stock funds (those that invest in stocks with market capitalizations between $1 billion and $5 billion) beat the Standard & Poor's 400 index of medium-capitalization stocks in the first quarter.

* 60% of all small-stock funds outpaced the S&P 600 index of small stocks in the quarter.

* The average large growth-stock fund--with first-quarter returns of 8%--beat the S&P 500/Barra growth stock index.

* And though the average small-growth-stock fund fell nearly 2% in the quarter, that was nowhere near the 8.5% drop in the S&P 600/Barra growth stock index.

While the blue-chip S&P 500 is among the best-known stock market indexes, it's hardly an appropriate yardstick by which to measure all types of stock funds, analysts say.

The S&P 500 measures the stocks of only the biggest and arguably most successful U.S. companies, those that happen to be enjoying the lion's share of the market's run in recent years.

In that sense, judging the recent performance of, say, a small-stock fund against the S&P would be about as fair as pitting a Chihuahua against a pit bull.

"It does a horrible disservice to the public to compare all funds against the S&P, even in normal times," said financial planner Harold Evensky of Coral Gables, Fla. "It's misleading. It confuses stock fund performance with stock sector performance."

In general, fund analysts and financial planners say investors ought to judge their funds against the performance of similar funds. If you follow even the most basic asset allocation rules, after all, you own different types of funds to gain the advantage of diversification--not to have all of your assets mimic the S&P 500.

If you compare your funds against market indexes, judge large-stock funds against a large-stock index, like the S&P 500; mid-cap funds against a medium-capitalization stock index; and small-stock funds against an index that tracks just small shares.

Some would argue that investors should go a step further, for instance by judging large growth-stock funds against an index that tracks only the biggest growth stocks, excluding so-called value stocks.

There's even a popular argument that large-stock funds shouldn't be judged against the S&P, because many large-stock funds invest a minority of their assets in medium- or small-cap stocks.

In his new book, "Common Sense on Mutual Funds," Vanguard Group founder John C. Bogle argues that the "preferred standard" index may be the Wilshire 5,000, a 7,200-stock index that represents the total U.S. stock market--large and small stocks alike.

While only 32% of all large-stock fund managers were able to beat the S&P in the first quarter, 50% of those funds topped the Wilshire 5,000, Morningstar says.

Though professional money managers have long since weaned themselves off the S&P as the sole performance barometer, it's clear many individual investors haven't.

Jeff Bronchick, chief investment officer for Reed, Conner, Birdwell in Los Angeles and manager of the RCB Small Cap Fund, recalls getting two phone calls last week--"one from a client who wanted to know what the hell was wrong with the small-cap fund, and half an hour later from a third-party consultant, saying hey, the small-cap fund seems to be doing well."

Times staff writer Paul J. Lim can be reached at

* FIRST-QUARTER TUNEUP: Investors can evaluate mutual fund performance and investment strategies in today's special "Your Investments" section, Business Part II, section S.

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