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Growth Funds Try to Mount Comeback

Stocks: Heavy tech holdings hammered large-cap category. Many managers now stress diversity.


At the height of the bull market, mutual funds that focus on large-capitalization growth stocks were the center of the fund universe, the "must own" category for millions of Americans.

Many investors still own one or more of these funds. But the severe losses the category has suffered over the last 2 1/2 years have a lot of people questioning what went wrong--and whether they should stay put.

In the late 1990s, large-cap growth meant the biggest companies in the fastest-growing, most exciting industries. And nothing was more exciting to Wall Street in that period than technology.

As large-cap growth fund managers loaded up with tech shares, the average total return on the funds topped 25% in 1997, 1998 and 1999.

But since the tech stock bubble burst in March 2000, losses for the average large-cap growth fund have piled up at a 26.6% annualized rate, according to data tracker Morningstar Inc. That is far worse than the 16.6% annualized loss rate in that period for the Standard & Poor's 500 index, the principal benchmark of the biggest U.S. stocks.

What's more, the most popular large-cap growth funds at the market peak in March 2000 have been among the worst performers on the way down: 11 of the 15 biggest funds, by assets, at the market peak have lost more than the category average since then, Morningstar data show.

The annualized loss rate of the Janus Fund, for example, was 28.4% between March 31, 2000, and Aug. 23. The fund's assets have slumped from $49.1 billion at the peak to $17.2 billion now.

Fidelity Aggressive Growth, the ninth-biggest large-cap growth fund in March 2000, has lost an annualized 48.6% since then, according to Morningstar. The Putnam New Opportunities fund's loss rate has been an annualized 36.9%.

In part, large-cap growth funds were victims of their own success. As money poured in from investors dazzled by the sector's high returns, the funds bid up prices of big-name growth stocks that already were arguably inflated.

"Large-cap growth got so big that the funds almost had to be in the most liquid stocks," said Jonas Max Ferris, editor of the Web site, which covers the fund industry.

Unfortunately for the funds and their shareholders, the most liquid stocks of the era included not only technology titans such as Cisco Systems Inc. and Intel Corp., but also such subsequently scandal-tainted names as Enron Corp., WorldCom Inc. and Tyco International Ltd.

Too Much for Too Long

Though fund-industry analysts say large-cap growth managers can't be blamed for their style of investing being out of favor since March 2000--since all investing styles have up and down cycles--it's clear that many funds remained too concentrated in technology and telecom stocks for too long, analysts say.

"You wonder how hard these funds were even looking at what they were buying," Ferris said.

The Denver-based Janus funds became closely associated with tech shares during the market boom, and paid the price when the sector busted.

"Some of the Janus funds took on a substantial amount of risk to earn such high returns in 1998 and '99, and the managers were not quick on the trigger in taking gains and selling out," said Brian Portnoy, a Morningstar analyst who covers Janus.

Similarly, Steve Oristaglio, deputy head of investments at Boston-based Putnam Investments, said growth-stock funds at his firm became "highly focused on tech and telecom. We believed the build-out was going to be faster than what has transpired, and we thought the economy would be stronger."

Scott Schoelzel, who manages the Janus Twenty fund, acknowledged that tech stakes hurt many of his firm's growth funds, but he said it's easy to second-guess managers after the fact.

"With the benefit of 20/20 hindsight today, it's true that Janus and its shareholders would have benefited from diversification away from tech and telecom earlier in the cycle," he said. "We, like most other fund families, would still be down but it may have mitigated some of the downturn."

Some large-cap growth funds that took a more sober view of the valuations on tech stocks and other large-cap leaders in the late 1990s have recorded relatively modest losses since the market peak.

The American Funds group's Growth Fund of America has lost 16.7%, annualized, since March 2000, according to Morningstar.

Individual investors who poured billions of dollars into large-cap growth funds in the late 1990s and much of 2000 bear part of the responsibility for what followed, said Phil Edwards, head of fund analysis at Standard & Poor's in New York.

"People had a short-term perspective, thinking the bull market would go on forever," Edwards said. "A lot of people didn't really realize what they were buying. They were just chasing performance," in turn pumping more air into the growth-stock bubble.

Investors plowed $224 billion into large-cap growth funds during 1999 and 2000, awarding the category 62% of total net stock fund inflows in that period, according to data tracker Financial Research Corp.

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