SIXTH AND FINAL ADD -- NYMONEY1 -- Investor Features Syndicate
PORTFOLIO
Security Blanket Funds
by John Tompkins
The dizzying volatility of the stock market during the week must have made you wonder if it wasn't time to take at least some of your money out of growth funds
and stash it in a safer place. You could buy CDs, T-bonds, or shares in a money fund. But there are more interesting alternatives: well- established mutual funds
that offer better than average safety in a down market.
Depending on your risk tolerance, the electrifying performance of the market was thrilling or frightening. Obviously, some of the nervous did bail out, but the vast
majority seemed to see the shuddering downdrafts as buying opportunities.
Some $1.6 billion worth of equity fund shares were cashed early in the week, Trim Tabs Financial Services, Inc. reported. Considering the estimated $2.1 trillion
invested in equity funds, the bailout number is not all that large. About three-fourths of the $1.6 billion was pulled out of internationally oriented funds, many of
which have suffered much steeper declines than those that put their money in U.S. stocks. A lot of the cash pulled out of mutual funds was parked at least for the
moment in money market funds. The Investment Company Institute says that $3.83 billion was moved into money funds during the week ended Oct. 29 bringing
their total assets up to $1.05 trillion.
The sharp up-and-down and down-and-up swings in the Dow Jones and the S&P 500 averages have made some mutual fund investors feel like the proverbial
donkey between two bales of hay, unable to make up its mind which way to turn.
It's reported that many shareholders who placed ''sell'' orders after the first sickening drop in the market canceled them the following day and some decided to buy
more shares.
Most of these investors went right back into the funds they were already invested in. But for those who want an alternative, there's very little reliable information
around. Mutual fund advertising almost always stresses historical performance, but winnowing out fact from tables of figures and colorful charts is difficult.
CDA/Wiesenberger, the oldest mutual fund tracking service, completed a study last month of the equity funds that have weathered bad times and come out ahead.
The study looked at top performing funds in four down market periods since 1976. A down period was defined as a time when the S&P 500 dropped more than
10%. Interestingly, few of the funds that did relatively well are widely known or advertised.
For example, CDA/Wiesenberger's favorite fund for a lengthy time period is the 27-year-old Sequoia Fund, a $3.1 billion fund with a total return of 31%
year-to-date compared with 18.39% for the S&P 500. Sequoia actually widened its lead over the S&P during this past hectic week. Though the fund has beaten
the S&P 500 for 20 years, it's run in a highly personal way. Co- managers Richard Cunniff and William Ruane firmly reject the standard advice to diversify and
focus on a dozen-and-a-half carefully chosen issues which they hold for years. Critics of Sequoia admit that Cunniff and Ruane have been smart enough to get
away with this, but insist that most funds should diversify, diversify, and diversify.
Cunniff and Ruane are almost unique in buying only companies and industries they understand, the opposite of the momentum approach. Sequoia's top 10
investments are led by Berkshire Hathaway (NYSE:BRX - news) which amounts to 27.7% of its portfolio assets. The second largest investment is Federal Home
Loan Mortgage Corporation (NYSE:FRE - news), and the third is Progressive Corp. Ohio (NYSE:PGR) a company specializing in high-risk auto insurance. The
top three holdings add up to more than half of Sequoia's assets.
Unfortunately, Sequoia Fund is closed to new investors.
While CDA/Wiesenberger's top choice is provocative, I'm sure you're more interested in the funds that rode out the 1987 market crash relatively unscathed.
The leader of the pack is Paine Webber Balanced Fund B, which managed to chalk up a 2.56% return in the month of the 1987 crash. Next was Rightime Fund
which was positive 2.48%. Rightime is a ''fund of funds,'' with a portfolio consisting of shares in other mutual funds. Its name is no longer apt because Rightime has
lagged the market more or less continually since its 1987 crash performance. Value Line observes, '' ... this fund has little to recommend itself and investors should
look elsewhere.'' Finally, IAAA Trust Allocation Fund had a 2.16% return.
None of these survivors of 1987 get high marks today. Instead a handful of conservative or contrarian funds, says CDA/Wiesenberger, ''may be a good option for
many investors to add to their portfolios to insure themselves from future declines.'' The first example: Value Line Leveraged Growth, a $450 million fund with a
16.1% return to date this year versus the S&P 500 at 18.39%. Value Line owns a fairly standard mix of solid growth and traditional blue chips: Dell Computer
(Nasdaq:DELL), Intel (Nasdaq:INTC), Gillette (NYSE:G), Coca-Cola (NYSE:KO), and Citicorp (NYSE:CCI).
Second CDA/Wiesenberger pick: Lindner Growth, with an 11.1% devoted to small caps which have not been performing well in recent years. But it's low in
volatility. Lindner leans strongly to little known stocks: Charming Shoppes (Nasdaq:CHRS) women's specialty stories, LASMO (NYSE:LSO) oil and gas, Novell
(Nasdaq:NOVL) networking software, Old Republic International (NYSE:ORI) insurance, and Alliant Techsystems (NYSE:ATK) munitions.
Third is Van Kampen American Capital Pace Fund A with a 19.5% total return. Van Kampen steers a middle course: Philip Morris (NYSE:MO), Tele-Comm
TCI Group Cl A (Nasdaq:TCOMA) CATV systems, RJR Nabisco (NYSE:RN), Microsoft (Nasdaq:MSFT), and Van Kampen American Cap Small Cap Fund,
which is its second largest holding.
All three funds, says the report, have consistently proved their mettle during longer downturns, and yet they have very different portfolios. This proves nothing
except that portfolio management is much more important than stock selection. In these cases three very different styles of stock picking were successful in
providing less volatility and greater safety. Lipper Analytical looked at the question of stability and safety a different way. It studied how various funds performed
during the 10 years between September 1987 and the same month this year. Success during the period defined as not losing money shows that T. Rowe Price
Capital Appreciation was successful 95% of the time. Berger Small CapValue, Managers Capital Appreciation, and Salomon Brothers Opportunity were each
88% successful.
Putnam Voyager and Merger Fund were 87% successful.
Focusing more tightly on the worst three months of the 10 years, Lipper found that Comstock Capital Value A lost 12.76% of its return. In other words, it was the
best of the worst period. T. Rowe Price Capital Appreciation lost 14.7%, Janus Fund 18.59%, Merger Fund 21.71%, and Salomon Brothers Opportunity 23.1%.
During the wild market action of recent days many funds were having some difficulty handling phone calls from worried or eager investors. Their systems have
improved a lot since 1987, but the volume of activity and the speed of financial news is exponentially greater. When an investor can't get through to a broker, fund
dealer, or fund, paranoia can take over in the shape of suspicion that the delays may be deliberate.
A few days ago, for example, Fidelity was the target of complaints that incorrect closing prices of 18 Fidelity funds appeared in the newspapers on Oct. 29. The
official answer was that it was a ''miscommunication'' between Fidelity and the Nasdaq quote system. Then computer glitches were blamed. The problem affected
a handful of other fund families and was not repeated, but the explanation led some to jokes that White House spin control doctors had been hired in Boston.
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SOURCE: PR Newswire |
