Little guy gets a chance

Andrew Leckey

September 24, 1991|By Andrew Leckey | Andrew Leckey,Tribune Media

Score one for the little guy.

Institutional investors have known about stock-index funds for years. Lately, more and more individual investors are being given the chance to participate.

These funds replicate the overall stock market by simply buying a basket of shares in direct proportion to their percentage of the market. Some hold all the stocks in the Standard & Poor's 500, while others emphasize extended markets, foreign markets or specific stock groups.

The overall markets, you see, tend to outperform the vast majority of mutual fund managers year after year.

It's true that you won't get the enormous pop of a star fund when it's experiencing a stellar year, but you won't suffer through the drastic decline of a fund that has lost its way, either.

"An index fund is great as a 'core holding' because of its relative predictability and the likelihood you won't ever get clobbered," explained Gus Sauter, portfolio manager for $5.5 billion in index funds run by Vanguard Group.

"It offers good long-term performance, in part because of lower costs associated with transactions and management."

The Vanguard Index 500, biggest fund in the index field with $3 billion in assets, is up 22.21 percent this year. That compares with 22.37 percent for the actual S&P 500 for the same period.

That Vanguard fund annually spends about 0.28 percent of fund assets on expenses such as management fees, compared with 1.20 percent for the average stock fund. Low expenses are important if the fund is to replicate the index it has chosen.

That pioneering company in indexing also offers the Vanguard Index Extended Market; Vanguard Small Capitalization Stock Fund; International Equity Index Fund -- Europe; International Equity Index Fund -- Pacific; and the Vanguard Institutional Index.

"There's also a tax advantage to the index fund, since there are lower capital gains distributions because of lower stock turnover in the portfolio," said Jay Weed, portfolio manager for the $150 million-asset Fidelity Spartan Market Index Fund, up 22.25 percent this year.

Fidelity on Oct. 1 officially changes the name of that fund to the Fidelity Market Index Fund. At that time, it will also reduce the initial investment requirement from $10,000 to $2,500 to encourage more average investors to get involved.

Remember that investment miracles are unlikely with these funds. Some experts believe the 15 percent annual increases of the 1980s may give way to a more modest pace of 10 percent in the '90s.

"The 1980s were an extraordinary decade, and the investor shouldn't necessarily expect that the same strong results will occur in the '90s," warned Catherine Gillis, contributing editor of the Morningstar Mutual Funds investment advisory.

The largest stock-index funds available to individual investors and their 1991 performance, according to Morningstar, are:

Vanguard Index 500, Valley Forge, Pa., $3 billion in assets, no load, $3,000 minimum initial investment, up 22.21 percent.

Vanguard Index Extended Market, Valley Forge, Pa., $226 million in assets, no load, $3,000 minimum initial investment, up 29.97 percent.

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