DJ SmartMoney: A Few Good Funds: In A Volatile Market, Our February Picks Have Held Their Own
Dow Jones Newswires
This story appears in the June issue of SmartMoney magazine.
By Jeff Garigliano
Too many new offerings. Too many untested managers. Too much hot money. Too
many active funds getting thumped by the S&P 500. Our February cover story, "The
Best and Worst Mutual Funds," included these and other complaints about the fund
industry.
After running through all the wrongs, however, we found several funds that were doing things right. All had solid long-term returns, avoided fast money, were tax-efficient and had experienced managers with solid stock-picking records.
How have they done so far? Of the seven funds we highlighted that month in "As Good as It Gets," two are up substantially, three have done respectably, one's even, and one's in the red.
Vanguard U.S. Growth virtually matched the S&P 500, with a 14 percent return since we picked it back in December. But more recently -- during the spring of 1999 -- the fund has trailed the index. "It's been a relatively rough three and a half months here," says co-manager David Fowler, adding that tech stocks like Compaq, 3Com and BMC have held back the fund. "These aren't big positions, but they've been noticeably painful."
EuroPacific Growth, our second-best pick, is up almost 14 percent, which trounces the 5.5 percent return posted by the Morgan Stanley EAFE index of international stocks.
Somewhat further behind is T. Rowe Price Mid-Cap Growth. Despite a lackluster market for midcap stocks, the fund is up 8.3 percent, which outpaces the 4.9 percent gain in the S&P Midcap index. Manager Brian Berghuis has focused on less well- known names, such as financial giant Capital One. He picked up shares at about $60 last October after the stock fell more than 50 percent. By late April the stock was trading at $162.
We can't complain about the 6 percent return from midcap fund Ariel Appreciation, either. The fund beat the S&P Midcap index at a time when, as manager Eric McKissack puts it, "our focus toward high quality with attractive valuations hasn't helped us much."
Scudder Growth & Income has climbed only 5 percent since we picked it. But the fund, with nearly a quarter of the portfolio invested in industrial cyclicals, seems perfectly positioned to capitalize on the market's recent turn toward cyclical stocks. Georgia Pacific, for example, is one of the fund's 110 holdings and has been on a tear, up 27 percent for the first quarter alone. "If the world economy strengthens, then people will have more confidence that earnings from anything cyclically oriented will stop going down and start going up," says manager Robert Hoffman. "That is the kind of market in which we outperform."
Finally, our two underperformers of the group invest in (surprise) small-cap stocks. Fasciano and Acorn USA haven't set any records over the past four months, but both are about even with the Russell 2000 small-cap index (which gained a scant 0.4 percent over that time).
As Acorn USA manager Robert Mohn puts it, "This was a difficult quarter." Mohn's fund, up 0.4 percent since we picked it, suffered in part because of health care stocks like Lincare Holdings, which ran into problems complying with Medicare rules and fell 30 percent, and Magellan Health Services. But don't bet against Mohn for long. His strategy is based on the one used by the legendary Acorn Fund, which has returned more than 8,000 percent since its inception in 1970. That's nearly double the S&P 500's return over the same period.
We're not worried about the Fasciano fund, either. It's down 1 percent since we picked it, but for all the right reasons. Namely, cash. Interest in the fund mushroomed, and the fund tripled in size to $330 million in net assets, after manager Mike Fasciano turned in a stellar 15 percent return over the first half of 1998 and Morgan Stanley's Leah Modigliani ranked the fund No. 1 among small caps (based on a 10-year, risk-adjusted return). With the cash piling up around him -- nearly 50 percent of the portfolio earlier this year -- Fasciano took his time putting it all to use. But the flood tide has started to slow, and Fasciano should be pretty much fully invested by July. In the meantime, he's on the lookout for discounted small caps: "A company misses its earnings by a penny, or 2 cents, and a lot of the momentum people bail out. We're there with a bushel basket, and we've got cash to buy."
SECTOR FUNDS
You'd think a tech fund with a 52 percent return in just four short months would have to be loaded up on Internet stocks, right? How else could Northern Technology get such stratospheric results? Well, think again. Internet stocks make up less than 20 percent of the portfolio at Northern Technology; hardware and software makers, chip manufacturers and communications-equipment makers fill out the rest.
That's the kind of diverse portfolio we wanted when we chose Northern Technology as one of three sector funds in our January cover story, "Where to Invest in 1999." To make our picks, we first chose six industries -- including banks, computers and home builders -- where market guru Elaine Garzarelli saw lower-than-normal price/earnings ratios and strong prospects for a rally. We then looked for solid funds with consistent above-average performance, below- average expenses and low volatility.
Northern Technology's co-manager John Leo says keeping his stock picks spread throughout the sector helped his fund skate through the minicorrections Dell and Compaq suffered earlier this year. "We've emphasized some less-PC-related companies that have been better performers, like EMC and Sun Microsystems," he adds.
Vanguard Health Care has done well so far this year, climbing more than 8 percent. (The average health care fund gained 6 percent.) Manager Edward Owens loads up on blue-chip pharmaceuticals but also makes value plays in areas he thinks may have been beaten down unfairly, like the HMOs he's been buying recently. The bad news: Vanguard closed the fund to new investors in February.
The recent boom in financial-services stocks has been focused almost exclusively on large-cap household names like Charles Schwab (which jumped 75 percent in the first three months of 1999). But these stocks aren't in the portfolio of the PaineWebber Financial Services Growth A fund, which helps to explain why the fund is up a slim 1 percent since we picked it. "We're not just going to chase the things that are going up," says co-manager Andy Dinnhaupt. "Schwab is now trading at about 85 times earnings," considerably higher than the fund's P/E multiple of about 16 times 1999 estimates. Growth at a reasonable price is more Dinnhaupt's speed. For now, that means companies like financial guarantor Ambac, which has been growing 14 percent a year, as well as Nationwide Financial Services, the country's third-largest underwriter of individual variable annuities. "It's a play on the growth in retirement savings," he says.
SmartMoney.com: Check out our Web site for daily updates and news on the magazine's latest stock and fund selections.
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