Shaking up the roster

Slam! Crack! Smash!

Forget, for a moment, falling stock-market indexes, concerns about excessive valuations, and the threat of additional interest-rate hikes by the Federal Reserve. Thousands of fund investors have been walloping stock-market hits into the grandstands in recent weeks, thanks to stellar performances by active fund managers.

To paraphrase Yogi Berra: "Hefty mutual-fund returns are now 90 percent actively managed. The other half is indexed."

Going into last week, for example, actively managed funds were clearly back in business, beating the benchmarks (and index funds) that had eluded them in the past few years.

The Fidelity Magellan fund was up almost 5 percent for the year. The Janus Twenty fund was up over 5 percent. But funds linked to the Standard & Poor's 500 index, including the Vanguard 500 Index fund and the Fidelity 500 Index fund were up only a little more than 2 percent.

While the S&P 500 inched forward, the Dow Jones Industrial Average was off 5 percent as of March 31, the end of the first quarter.

Meantime, the technology-oriented Nasdaq Composite Index soared 12 percent, while the Russell 2000 Index, which measures small-company stocks, sailed up almost 7 percent.

Little surprise then, that fund groups with actively managed funds linked to technology stocks, as well as small and mid-sized companies, saw huge inflows to their coffers.

An actively managed fund is led by a manager who typically buys and sells stocks for the fund on a daily basis, both to maximize returns and ensure the stability of the portfolio. The style of management is based on the goals of the fund, as spelled out in the fund’s prospectus.

An index fund, by contrast, has a portfolio largely based on a computer program. Buying and selling is minimal. The manager’s role varies from fund to fund, though managers at big fund companies like Vanguard may have more to do than at fund groups with smaller asset sizes.

Fund companies garnering big investor flows in recent months include Janus Group, Invesco, and PBHG Group. Janus, which offers a broad array of actively managed funds linked to technology, has shot from the 10th-largest fund group in the past year to No. 5.

For the first quarter, science-and-technology funds rose roughly 18 percent, according to Lipper Inc., a New York-based financial-services company. Health and biotechnology funds also soared up an average of 18 percent. Growth funds specializing in mid-sized companies were up an average of 17 percent.

Still, last week’s downdraft in the Nasdaq index – in part reflecting the sudden plummet in Microsoft shares, following an adverse antitrust ruling – once again raised questions about whether even actively managed fund managers can keep their batting averages in record-book turf while the overall market sags.

The fundamentals for the overall stock market, however, continue to look impressive, says Joe Tigue, managing editor of “The Outlook,” a financial review published by Standard & Poor’s Corporation. Employment remains strong. More US goods are being sold abroad as Europe and Asia rev up regional growth. Consumer confidence, although dipping recently, remains robust by historical measurements.

“We’re still optimistic about this market,” says Mr. Tigue. “We see the S&P 500 index rising at least 10 percent this year, with blue-chip companies coming back, and old-line technology firms [such as Sun Microsystems, Cisco Systems, and Intel] looking strong,” he says.

The recent round of market dips add up to a good “buying opportunity” for long- term investors, Tigue says.

“We feel that this is still a positive environment for equity investing,” says Charles Kadlec, chief investment strategist for mutual-fund company J. & W. Seligman, New York. “First-quarter growth was in excess of 4 percent [in the US], and productivity continues to rise,” he notes.

Indeed, productivity gains should continue to bolster the technology sector, says Mr. Kadlec, as more companies increase their computerization. He is especially upbeat about the semiconductor sector, as well as small- and mid-cap stocks.

“The biggest risk for investors right now is to be mesmerized” by market turbulence, and thus “be out of the market, rather than being in it,” he says. Even many fund managers with hefty exposure to technology remain essentially bullish.

“We recognize that many companies” in the tech sector have valuations that “are too high,” says Alex Vallecillo, manager of the Parkstone Midcap Fund, based in Cleveland. His fund has over a 50 percent exposure to technology. “But we’re making a distinction between ‘technology’ firms, many of which are older technology companies and offer solid underlying economic fundamentals, and the pure-play ‘Internet companies,’ ” which are riskier, he says.

Despite the recent market commotion, Mr. Vallecillo’s fund was up 23 percent in February alone, and up 24 percent through the quarter. He expects the gains to continue, based in part on brisk earnings by old-line tech firms.

For investors in index funds – who do not have managers who can quickly buy and sell specific stocks to offset market turbulence – all is not lost in the current roller-coaster climate, says Gus Sauter, who heads up index products for the Pennsylvania-based Vanguard Group, including Vanguard’s highly regarded 500 index fund, which he manages.

The “historical evidence” shows index funds tend to more than hold their own against managed funds in market downturns, Mr. Sauter says. In three of the five market downturns since the early 1970s, returns by index funds exceeded returns of managed general-equity funds, he says.

“We recommend that investors have a broad-based index fund, such as a total market fund,” linked to an index such as the Wilshire 5000, which measures the overall US stock market, Sauter says.

Results by fund category

Type of fund 1st qtr. 2000 1-yr. 5-yr.annualized

US STOCK (diversified) 7.04% 35.66% 22.08%

Large-Cap Growth 8.49 38.08 29.39

Large-Cap Core 4.11 21.70 24.42

Large-Cap Value 0.72 9.37 20.30

Multi-Cap Growth 13.13 65.05 30.23

Multi-Cap Core 5.39 25.46 21.96

Multi-Cap Value 1.10 8.13 16.32

Mid-Cap Growth 17.02 97.82 29.56

Mid-Cap Core 15.18 60.23 24.00

Mid-Cap Value 5.76 21.24 15.69

Small-Cap Growth 16.01 93.41 25.03

Small-Cap Core 11.44 54.26 18.19

Small-Cap Value 5.37 24.01 14.24

S&P 500 2.13 17.18 26.17

Equity Income -0.79 3.04 15.37

SECTOR FUNDS 7.88% 36.77% 20.13%

Health/Biotechnology 18.16 45.24 20.98

Natural Resources 8.77 31.42 9.21

Science & Technology 17.97 137.76 44.10

Telecommunications 13.01 69.62 36.53

Utilities 6.88 26.59 18.92

Financial Services -0.27 -3.76 20.27

Real Estate 1.79 2.87 8.57

WORLD STOCK 2.72% 48.81% 13.60%

Gold -14.58 -5.58 -12.83

Europe 5.93 33.93 21.39

Pacific -1.38 75.32 6.58

Japan -3.00 79.27 10.48

China 14.77 91.8 15.49

Emerging markets 3.94 65.41 7.30

Latin America 4.44 50.83 13.28

Large Cap - Funds with at least 75 percent of their holdings in companies whose total stock value is at least $11 billion.

Mid-Cap - Funds with at least 75 percent of their holdings in companies whose total stock value is less than $11 billion.

Small-Cap - Funds with at least 75 percent of their holdings in companies whose total stock value is less than $2.4 billion.

Multi-Cap - Funds that invest in a mixture of large-, mid-, and small-cap stocks, without a 75 percent concentration in any category.

Growth - Funds that invest in companies whose earnings and revenues are expected to rise rapidly.

Value - Funds that invest in companies that have lost favor in the market, but are viewed as having strong earnings potential.

Core - Funds that contain a blend of growth and value stocks.

Equity Income - Funds that invest in stocks that produce high dividend income.

Balanced - Funds that contain a balance of stocks and bonds.

Convertible - Funds that invest in bonds that can be converted into common stock.

Top-performing funds

First quarter 2000 Total return Phone number

Frontier Equity Fund 105.4 800-231-2901

Perkins Discovery 64.2 800-280-4779

American Heritage Fund 61.5 800-828-5050

Munder Framlington Hlthcare B 47.2 800-438-5789

Dreyfus Prem Greater China A 45.9 888-338-8084

Ivy European Opportunities A 44.8 800-777-6472

Rydex Electronics Inv 43.5 800-820-0888

Driehaus European Opportunity 42.8 800-560-6111

Pin Oak Aggressive Stock 42.5 888-462-5386

PBHG New Opportunities 42.4 800-433-0051

One year

PBHG New Opportunities 529.9 800-433-0051

Driehaus International Discovery 282.1 800-560-6111

Driehaus European Opportunity 270.0 800-560-6111

Firsthand Technology Value 260.7 888-884-2675

Profunds UltraOTC Inv 250.9 888-776-3637

HomeState Technology 249.4 800-232-0224

BlackRock Micro-Cap Eq. Inv B 244.0 800-441-7764

PBHG Select Equity 240.8 800-433-0051

PBHG Technology & Comm 234.0 800-433-0051

Five year (annualized)

Firsthand Technology Value 67.3 888-884-2675

Fidelity Select Electronics 59.4 800-544-8888

Rydex OTC Fund 58.8 800-820-0888

PIMCO:Innovation A 57.8 888-877-4626

First American Technology Y 54.5 888-884-2675

Fidelity Select Technology 53.8 800-544-8888

INVESCO Telecommunications 51.4 800-525-8085

Fidelity Select Computer 51.0 800-544-8888 INVESCO Technology II 48.0 800-525-8085

(c) Copyright 2000. The Christian Science Publishing Society