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Friday, October 2, 1998
What keeps the top-flying funds aloft?
Here are some lessons learned from the mutual funds
that are delivering stellar returns in an otherwise
dark year.
By Andrew Marks
If you're a mutual fund investor who's seen his or her
latest statement, you may find it hard to believe that
there are still funds with 20%-plus gains since
January 1. There are, of course -- though their number
is shrinking daily. But which are they, and how have
they managed to thrive in a year when the average
domestic equity mutual fund has lost nearly 4%?
To find out, we examined a list of the mutual funds
with the best total return through the end of
September as tracked by Morningstar, the Chicago-
based investment and mutual fund research firm.
As of our cut-off date, all these funds had total
returns of at least 20% -- though after the continuing
market damage on Thursday, several of them may be
under that mark today. The Dow Jones Industrial
Average droppedl 210.09, or 2.7%, on Thursday to close
at 7632.53. The S&P 500 fell 30.66, or 3 percent, to
986.38 and the Nasdaq composite index lost a whopping
81.51, or 4.8 percent, to 1612.33.
The story in a nutshell? Most of this year's winners
are lucky enough to have big stakes in the shrinking
oasis of big-name stocks with solid earnings, or else
they are pursuing a specialized investment strategy
that happens to be holding up well.
Breaking it down by investment category, large-cap
growth placed the most funds --11-- among the 31 funds
with returns of at least 20%, followed by specialty-
technology with six, and health care specialty funds
with four. "The large cap funds and technology funds
have clearly been the way to go this year," observes
Morningstar analyst Christine Benz.
A look at their holdings reveals two other common
denominators: Most have a small number of stocks in
their portfolios (20 to 35, compared to the average 75
to 125 stocks in the average domestic equity fund's
basket), and many of the stocks they own are the same.
Which stocks? None other than what remains of the so-
called 'nifty twenty' companies that had been driving
the market earlier in the year -- firms like Microsoft
(MSFT), Dell (DELL), Cisco (CSCO), America Online
(AOL), Yahoo (YHOO), Lucent (LU), Merck (MRK) and
Bristol-Myers Squibb (BMY).
"It's amazing, but it looks like there are about ten
stocks supporting the gains of the top funds, and
that's a little scary," says Benz. Ninth-ranked PIMCO
Innovation's portfolio is typical. Its five biggest
holdings: Microsoft, Cisco, AOL, Yahoo, and Intel
(INTC).
Now as it happens, the top-performing fund --
ProFunds UltraOTC , which boasts an extraordinary 67%
gain -- sounds like an exception. It holds no stocks
at all. "We buy exchange-traded futures and options on
futures," explains ProFunds director of portfolios,
Bill Seale.
But the fund's winning bets have been placed on the
Nasdaq 100, which of course is dominated by stocks
like Microsoft, Cisco, Yahoo, and Intel. The same goes
for Potomac OTC Plus (up 42% year-to-date) and Rydex
OTC (up 37.6%).
Still, there are significant exceptions to the rule.
The list includes an international hybrid fund
(Montgomery Global Long-Short), a European stock fund
(AIM European Development) and even a long-term bond
fund (American Century-Benham Target Maturity 2025)
sporting an impressive 24% total return thanks to the
current bull market in bonds.
Moreover, a big stake in familiar winners seems
necessary -- but not sufficient -- for success. Most
funds on the list also are holding smaller stocks with
big gains. The two biggest holdings at tenth-ranked
Transamerica Aggressive Growth, for example, are the
predictable Dell and Amazon (AMZN). But the next two
are lesser-known General Re (GRN), which had a big
run-up in June before sagging recently, and Pro
Business (PRBZ), which even after a recent decline has
still more than doubled in price this year.
"These aren't names you'll find in most of these
funds' portfolios," points out Phil Trike, vice
president and portfolio manager for the fund.
"Outstanding stock selection is the reason behind our
success this year, and I think you'll find the same is
true for the other funds as well."
Morningstar's Benz agrees: "The concentrated format of
investing in a small number of stocks has been coming
into vogue, and you see a number of those kind of
funds among the top performers," she says. "Those
funds tend to attract the better managers too -- the
stock pickers."
Here are the 25 top-performing funds through
the end of September, along with their total
return for the year, according to Morningstar,
the Chicago-based investment publisher and
research firm.
ProFunds UltraOTC 62.9% UOPIX
Potomac OTC Plus 42.4 POTCX
Fidelity Select Computers 40.8 FDCPX
Rydex OTC 37.6 RYOCX
Dreyfus Technology Growth 37.4 DTGRX
Janus Twenty 33.7 JAVLX
Montgomery Global Long-Short 33.3 MNGLX
Berger Select 32.6 BESLX
PIMCo Innovation 30.8 PIVAX
Transamerica Premier Aggressive Growth Inv 28.6 TPAGX
Idex Growth 28.2 IDETX
PBHG Large Cap 20 27.7 PLCPX
Munder NetNet 24.8 MNNAX
Fidelity Select Health Care 24.5 FSPHX
Amerindo Technology 24.1 ATCHX
Invesco Strategic Health Sciences 24.1 FHLSX
American Cent-Benham Target Mat 2025 24.0 BTTRX
Marsico Focus 23.6 MFOCX
AIM European Development 23.5 AEDAX
ASAF Janus Capital Growth 23.0 JCGAX
Alger Capital Appreciation Retirement 22.9 ALARX
Nations Marsico Focused Equity Inv 22.6 NFEAX
Caldwell & Orkin Market Opportunity 22.5 COAGX
Smith Barney Telecomm Income 22.2 ATINX
Flag Investors Communications 22.2 FTIDX
Marketwatch for Thursday, October 1, 1998
Dow Jones Industrial Average: down 210.09 (2.68%) to
7632.53
The Money 30 Index: down 67.16 (4.35%) to 1478.35
New York Stock Exchange
Advances: 780
Declines:2418
Volume: N/A million shares
NASDAQ Composite: down 81.51 (4.81%) to 1612.33
S&P 500 Index: down 30.66 (3.01%) to 986.39
Russell 2000: down 3.73 (13.55%) 350.04
30-year Treasury bond yield: down 11 basis points to
4.87%
London gold (afternoon fix): up $3.75 at $297.60
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