Nice article from the NY Times' Floyd Norris on how mutual fund managers are/were forced into the segments du jour by marketers (or lose their jobs). LOL! Just in the nick of time....
nytimes.com
May 5, 2000
FLOYD NORRIS
When the Marketing Department Decides How to Invest
A decade ago the Vanguard Group was worried about poor
performance and poor sales of its small stock fund, the Explorer Fund. It had lagged for years because the managers insisted on loading up on technology stocks, which looked cheap but kept getting cheaper.
Something had to be done. So management stepped in and announced new policies. Henceforth, the fund's managers could put no more than 40 percent of assets in tech stocks -- far below the 69 percent the fund then had.
That order -- which in hindsight looks amazingly foolish -- came to mind this week when another fund manager, Prudential Insurance, announced a shake-up. A couple of its managers who are known for buying deep-value stocks -- that is, stocks that look cheap by such measures as price-earnings ratios -- were fired. Their operation is being turned over to Jennison Associates, a Prudential subsidiary known for growth-stock investing.
It is no secret what went wrong at Prudential. The ousted managers kept buying value stocks even as they got cheaper. The funds' performance suffered, and Prudential saw competitors taking a bigger share of mutual fund cash inflows. "It is a need to recognize what is going on," explained John H. Hobbs, the chairman and chief executive of Jennison. "Growth has been the whole story in the marketplace for the last few years."
Prudential says it is not abandoning value investing. But Prudential's managers looking for value stocks will now focus on what Mr. Hobbs calls "relative value." As he explains it, that will enable funds devoted to value investing to buy technology stocks, because even if prices for those stocks are high by traditional value standards, some are sure to be better values than others.
Prudential is not alone in concluding that the market requires value managers to seek greener pastures. Neuberger Berman, for years one of the best value managers, has seen assets flow out as its funds underperform. Its first technology fund began operation this week. There is nothing inherently wrong with a money manager changing strategy. Markets and economies do change, and a strategy that performs well in one environment may not work when the world changes. But when changes are made largely for marketing reasons, you have to wonder if they are coming too late.
In late 1989, the depressed state of technology stocks was obvious, and so, too, were the reasons the stocks had done poorly. Japan was beating America in technology, and investors feared that even leading technology companies might be damaged by upstart competitors. Intel, which then as now dominated a rapidly growing market, was trading below its 1983 high, while less successful technology companies had seen their share prices decimated. Vanguard's move came less than a year before technology stocks started a historic bull market.
The Pacific Stock Exchange technology index dates from September 1982, at a time of rising enthusiasm for technology stocks. It peaked in mid-1983, and then missed the rest of the 1980's bull market in stocks. Only after that poor showing had gone on for years did Vanguard decide that technology stocks should be avoided.
In the 1990's, the relative performance reversed. The technology index rose almost 1,500 percent in that decade, nearly five times the gain in the S.& P. 500. And now the marketing people at fund companies that focus on value have discovered technology stocks. |
