Evaluate index funds by individual suitability, management and costs

MUTUAL FUNDS

September 13, 1992|By WERNER RENBERG | WERNER RENBERG,1992 By Werner Renberg

People often ask: "What do you think of index funds?"

A proper, if not helpful, answer to the question: "It depends."

Index funds are mutual funds that are managed to match or exceed the performance of certain stock or bond price indexes by investing in many, if not all, of the securities represented in the indexes.

Whether a particular index fund is suitable for you, therefore, depends largely on the suitability of the stocks or bonds reflected in the index to which it is linked.

It also depends on how closely the fund tracks its index. Other important factors: the quality of the fund's management and the costs that shareholders have to absorb. (Some fund managements boost results temporarily by absorbing costs.)

In principle, passively managing money by linking securities to an index has much to recommend it, even if it involves the risk of remaining invested during bear markets. Performance tends to exceed many, if not most, actively managed portfolios of similar securities; it's also relatively predictable. Moreover, costs tend to be lower than those incurred in actively managed funds.

Billions of dollars in pension fund assets already were linked to the Standard & Poor's 500 composite stock price index when Vanguard Chairman John C. Bogle decided in 1975 to apply the indexing concept to mutual funds, starting with the S&P 500 the following year.

The result: the Vanguard Index Trust 500 Portfolio, now at $5.4 billion in assets and still growing. The fund invests in all 500 stocks in about the same proportions as they are represented in the index. They, in turn, represent 75 percent of the value of all U.S. stocks.

In the ensuing 16 years, as one competitor after another joined the fray, Vanguard launched several funds, each targeting a different segment of the broad securities market.

The menu of index funds generally available to individual investors:

* S&P 500-linked funds, including the Vanguard fund and competitors such as Fidelity's Market Index and Dreyfus' Peoples Index. While Vanguard's annual expenses run 0.20 percent of assets, Fidelity's have been temporarily capped at 0.35 percent and Dreyfus' have been waived altogether; if the waiver were lifted now, they'd be 0.88 percent.

* S&P 500-related funds. Vanguard Quantitative Portfolios and IDS Blue Chip Advantage invest in the most attractive of the 500 stocks in order to beat the index. Dean Witter Value-Added Equity Portfolio is invested equally in all 500.

* Other U.S. equity index-related funds. Other equity indexes on which funds are based range from Wilshire Associates' 5000 (Vanguard Total Stock Market) to those that group stocks by size, such as the Russell 2000 (Vanguard Small Capitalization), S&P 400 MidCap (Dreyfus Peoples S&P MidCap), Schwab 1000, Wilshire 4500 (Vanguard Extended Market), and S&P 100 (Gateway Index Plus and Principal Preservation S&P 100 Plus).

* Bond market index. The Vanguard Bond Market Fund reflects the Salomon Brothers broad investment-grade (BIG) bond index.

* International equities. Vanguard offers European and Pacific portfolios, which track Morgan Stanley's regional indexes.

What, if anything, could be missing from this variety? Two things, Vanguard concluded, and Mr. Bogle recently announced the latest innovation, funds that would be linked to "value" and "growth" indexes.

Vanguard has proposed:

* A balanced index fund. Sixty percent of the fund would be invested to match the Wilshire 5000; 40 percent to match Salomon's BIG bond index.

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