WSJ-- Nasdaq 100 Funds Lose Assets
March 11, 1999
Nasdaq 100 Funds Lose Assets
Despite Sizzling Performance
By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
Those once-sizzling Nasdaq 100 index funds are still sizzling-so why are investors fleeing?
Despite the stellar start for technology
stocks in 1999, mutual funds pegged to the
tech-heavy benchmark have lost assets at
an astounding clip recently, even as the
funds continue to beat most major indexes and stock funds.
After frenzied asset growth through January, UltraOTC ProFund has seen 37% of its assets vanish in the past five weeks. Potomac OTC Plus and Rydex OTC Fund lost 36% and 23% of their assets, respectively, over roughly the same period.
"That's pretty extreme," says Russel Kinnel, head of stock-fund research at fund-tracker Morningstar Inc., Chicago.
The quick exodus is particularly unusual given that index funds, which mimic a specified benchmark stock index, generally draw sit-tight investors. Stock-index funds mirroring the large-company Standard & Poor's 500-stock index, for example, have grown in recent years even through periods of market volatility, unlike many funds managed by stock pickers.
But these aren't your everyday index funds. The Nasdaq 100 index, which tracks the Nasdaq Stock Market's 100-largest nonfinancial companies, including Microsoft Corp., Intel Corp. and MCI WorldCom Inc., has reaped huge gains in recent years but has proven extremely volatile. And both Potomac, managed by Rafferty Asset Management of Harrison, N.Y., and UltraOTC, managed by ProFunds Advisors, use derivatives, which are financial instruments such as futures or index options, to leverage their bets.
What's more, some market watchers, including Morningstar's Mr. Kinnel, say the sudden flow of money out of these Nasdaq funds simply reflects their true philosophy: welcoming to the trader but not the long-term investor.
Padco Advisors, which manages Rydex OTC Fund, and the other OTC-fund advisers insist their products aren't just market-timing vehicles. The Nasdaq funds bring investors into "a lot of exciting industries" that are important in today's service and technology-based economy, says Robert Steele, vice president of marketing and product development at Rydex. He says more Rydex customers are buying and holding the OTC fund than before, and that has helped reduce the turnover of stocks in the fund from more than 25 times annually in the mid 1990s to about 10 times last year.
Analysts say the OTC funds fell victim to the same problem that afflicts many small-growth stocks: a loss of price momentum that chases out a big group of short-term investors. So even as the funds are up 11% to 16% so far this year, that pales beside last year's absolutely torrid performance. UltraOTC ProFund was one of last year's single-best performers, with a staggering 185.34% annual return.
"Ninety-five percent of mutual-fund investors are long-term, but the other 5% are constantly chasing yesterday's numbers," explains Geoff Bobroff, a fund consultant in East Greenwich, R.I.
In contrast to the Nasdaq index funds, tech funds managed by stock pickers haven't experienced the same exodus as the index products in recent weeks. Indeed, in the nine weeks ended Feb. 24, investors poured money into tech funds in all weeks but one, says AMG Data Services, Arcata, Calif. For example, Munder NetNet Fund, Van Wagoner Technology Fund and Dreyfus Technology Growth Fund all enjoyed new assets coming in for several consecutive weeks.
Another contributing factor to the odd withdrawals at the index funds is that none of the three advisers running the portfolios penalize investors who move out. This makes it easier for investors to shift their bets quickly if they see a changing tide. The funds' advisers say many investors are staying within the fund complexes, shifting to money-market funds, stock-sector funds and funds that bet on downward price movements in the Nasdaq index.
Many of these funds' investors also may be drawn to a new hot product. Just Wednesday, the American Stock Exchange launched an exchange-traded unit-investment trust, or fund, based on the Nasdaq 100 index. In its first trading day, the Nasdaq 100 shares were the second most heavily traded security on the Amex.
Some better-known index-fund managers look down on the idea of Nasdaq index funds. They "attract bettors" and "are too narrow" for an index fund, says Brian Mattes, a spokesman for Vanguard Group, the S&P 500 indexing king. "An index's strength is its low cost and its diversification," he adds. With more stocks in an index fund, the investor "is exposed to all parts of the market."
But the Nasdaq fund advisers say the products have good long-term potential and note that in the past week, some new money has flowed in.
* * *
TECH BETS: As technology stocks give investors a wild ride, Fidelity Investments' money managers have been hanging on. And, as of Jan. 31, some of the Boston firm's funds had even increased their already large tech bets, according to Fidelity's monthly Mutual Fund Guide, released Wednesday.
In the most drastic example, Fidelity Fifty Fund, which concentrates its picks in the 50 to 60 stocks its manager considers most promising, had an astonishing 48.4% of its portfolio in technology as of Jan. 31, compared with 21.4% at year end. That compares with a 21.8% tech weighting for the Standard & Poor's 500-stock index on Jan. 31.
Fidelity's Contrafund edged up its technology holdings to 26.3% from 24.8%; Growth Company, to 28.5% from 25.1%, and Retirement Growth, to 31.4% from 23.2%. Magellan held steady at just under 26%.
Fidelity didn't disclose its largest holdings for the period; at year end, tech picks included familiar names such as Microsoft Corp., Intel Corp. and Cisco Systems Inc.
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