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Sizing Up Growth-Stock Fund Laggards

Some have trailed peers since 1999. It's a red flag, but pros say relative performance is just one factor to consider.


For growth-stock mutual fund investors, enduring the pain of the last 12 months' losses is bad enough.

But what if your growth fund not only fell more than its peers in 2000 and the first quarter of this year but also lagged behind its peers during the growth-stock surge of 1999?

As a rule of thumb, some financial planners say any fund that trails its peers for two straight calendar years should be closely reviewed.

The Times asked Morningstar Inc. for a list of growth funds that performed worse than their average peers in 1999, 2000 and the first quarter of 2001. About 70 funds emerged. Those that fared worst in the first quarter relative to their category average are shown in the accompanying chart. The list includes several prominent names such as Vanguard U.S. Growth, which has $30 billion in assets, and Invesco Blue Chip Growth, with $1.6 billion.

"Any time a fund underperforms its peers for two straight years, we put it on our watch list," said Roy Diliberto, a Philadelphia-area financial planner.

"Vanguard U.S. Growth is a good example," added Diliberto. "We're not selling that fund. We always look at a lot of factors. But we're not buying any more of it."

Still, many financial advisors say that any fund deserves at least three, and perhaps five, years to prove its mettle. They note that many funds have bounced back in a big way after extended slumps.

One thing advisors agree on is that relative performance is just one factor to consider in evaluating any fund. A fund may lag its peers but still meet your goals.

Some of the managers whose growth funds popped up on our screen said it's unfair or misleading to say they've lagged behind, pointing to the flaws inherent in comparing funds that supposedly fall within the same category--in this case, as grouped by Morningstar.

Many growth-fund managers explain laggard results over the last year, at least, by arguing that they're remaining true to their stated investment style--while other growth funds are buying "value" stocks.

Valerie Malter, whose Kemper Growth fund has about $1.7 billion in assets, said she is proud of her record since taking over the fund in early 1999.

"If you look at the top-quartile large-cap growth funds over the past 12 months, those funds are more 'value' and smaller-cap than I am," Malter said. "It has nothing to do with my ability as a [growth] portfolio manager."

Although Kemper Growth's returns of plus 36.9% in 1999 and minus 19.7% in 2000 trailed the Morningstar large-cap growth averages, Malter points out that the fund beat the Russell 1,000 growth stock index by several percentage points both years.

"That's the benchmark I'm paid to beat," she said. "Our shareholders want us to be a true growth fund. The last thing I'm going to do is try to outperform a peer universe that's roaming all over the place."

She said she has continued buying classic growth stocks with higher earnings growth rates, higher price-to-earnings ratios and higher price-to-book-value ratios, while some managers whose funds are labeled "growth" have shifted toward more-stable but slower-growing "value" names such as Citigroup, Exxon Mobil and General Motors. Kemper Growth lost 21.5% in the first quarter.

In 1998 and '99, Malter said, manager David Dreman of the Kemper-Dreman High Return Equity fund was considered to be a category laggard because he stuck with classic large-cap value stocks.

"Dreman is not stupid, he's brilliant," Malter said. "Everyone saw that in 2000 when he stayed true to his style" and value stocks resurged.

Jeff New, whose Van Kampen Enterprise fund has $2 billion in assets, said his fund was affected by Morningstar's decision in early 1999 to change the way it calculates fund category data. The fund tracker now looks at price-to-earnings and price-to-book-value ratios separately for a fund's small-cap, mid-cap and large-cap holdings, rather than looking at those ratios for the portfolio en masse.

"We were 'large blend' [by Morningstar category] but then, not because of anything we did, all of a sudden the next day we were categorized as 'large growth,' " New said. "We thought about taking portfolio action to push us back into large blend. We care a lot about style consistency and we didn't want to jump around. But in mid-'99 we decided, 'OK, let's keep it large growth,' especially since our firm did not have another offering in the category."

To compete with a different peer group, New said, he boosted the fund's tech stock weighting, a move that now may look ill-timed, "with perfect hindsight," he said.

Van Kampen Enterprise rose 26.5% in 1999, lost 15% last year and slid 21.5% in the first quarter.

David Fowler, manager of Vanguard U.S. Growth, said his fund, like many others, has been dragged down by the tech stock wreck over the last year. Its underperformance in 1999, meanwhile, reflected a relatively low tech weighting compared with other growth funds.

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