The Nasdaq composite index has never been as volatile as this year. So how are some of the best-performing fund managers reacting?
Many are trading more than ever.
"The markets seem to move more quickly," said John W. Davidson, chief investment officer at Orbitex Management Inc. in New York.
"There's a real continuous rotation among things like semiconductors, software and business-to-business stocks. Those sorts of moves are going to cause some turnover."
The firm's Orbitex Growth Fund turned over its portfolio 957% in 1999, the third-highest trading rate among U.S. stock funds and 10 times as much as the average fund, according to Morningstar Inc. The fund's return was 98% in the same period.
Part of that came from a change in managers last year that resulted in a new crop of stock holdings, Davidson said. Current manager Richard Begun also traded actively, Davidson said, enabling him to capture some of the moves in industry groups.
Begun sold financial shares such as Mellon Financial and American International Group in the fourth quarter, as well as biotechnology stocks. He bought Amgen, Biogen and Medimmune in time to catch a rally late in the year, and then cut back before the 49% slide in biotech shares from their March 6 high.
Biotech and technology shares, which together dominate the Nasdaq composite, were among the biggest gainers in the market for the last year. During the last month those groups have been among the biggest decliners as the market slid.
Orbitex may be extreme, but it is part of a trend. Turnover for the average fund manager has increased to 92% last year, up steadily from 76% in 1994, according to Morningstar data.
Active trading is held in disrepute by some fund investors, who say it means higher costs and bigger tax bites as capital gains are realized. Morningstar and academic studies covering long periods tend to bear that out, but proponents of active trading say trading costs have plummeted enough in recent years that their impact is more than offset by better performance.
The tax issue can often be dodged if the manager is careful to offset gains with losses as much as possible, but generally it is best to hold funds like these in tax-deferred accounts, where the tax issue is moot.
In addition to lower trading costs, some managers believe that increased individual participation in the stock market has made movements more volatile and increased the potential for nimble professionals to make money.
These managers say trading more actively enables them to outpace major benchmark indexes, such as the Nasdaq, which surged 86% last year, its biggest annual gain ever.
Buying and holding doesn't work in a market as volatile as this one, some active traders say.
For example, the Nasdaq composite index slid 10% April 14, soared 5.9% the following Monday and jumped another 5.7% Tuesday. The index has risen or fallen more than 3% in a day 25 times this year, more than during the first 17 years of its existence. The 10 busiest days in Nasdaq history occurred this year.
As recently as 1998, the index on average gained or lost 1.4% each day. The average daily swing between 1971, when the index was created, and 1998 was 0.61%.
To keep up, Christopher McHugh, a money manager for Turner Investment Partners in Berwyn, Pa., advocates active trading.
"There's no ceiling stopping the stock once it starts going up," and stocks can fall just as far, he said. The firm runs the TIP Target Select Equity Fund, which returned 113% in 1999, and came in No. 2 in trading rates with 1,279% turnover, Morningstar said.
Turner's portfolios always will have relatively high turnover because the firm's managers study charts of stock prices to help decide when to buy and sell stocks, McHugh said. The firm also will quickly sell shares in a company if its earnings outlook changes.
Turner Investment believes so strongly in active trading that Chairman Robert Turner posted a report titled "Turnover Is Good" on the firm's Web site.
"As we see it, turnover in growth-stock investing is simply a practical adaptation to current market realities," Turner wrote. "In a market in which stocks zigzag like frenzied creatures in a video game, a certain trading nimbleness and aggressiveness are extremely useful."
Another Orbitex fund, Orbitex Strategic Natural Resources, was the fourth-most-active trader last year with 921% turnover; the fund returned 39% last year, trouncing the 21% return of the Standard & Poor's 500 index and beating the benchmarks for energy and basic-materials stocks.
For Orbitex's Davidson, that's the most important statistic. "We don't put a constraint on turnover," he said. "We look at our portfolio managers on a bottom-line basis."