Magazine tries to predict fund results

January 30, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- The complicated world of investing in mutual funds may just have been made easier. Then again, maybe it didn't.

Financial World magazine, along with Zacks Investment Research in Chicago, has come out with the first comprehensive attempt at predicting how mutual funds that invest in stocks will perform. That's a departure from the current practice of rating funds based on past performance.

"Everyone has been rating yesterday's winners, who tend to be tomorrow's losers," Associate Editor Lee Montgomery said.

The monthly magazine decided to analyze the biggest 350 equity mutual funds; it did not rate bond funds. The stocks that make up each fund were analyzed by Zacks, which predicts their future performance based on earnings estimates by Wall Street analysts.

Based on Zacks' rating for the stocks, the funds were given ratings,with A+ being the highest and F- the lowest. The ratings, which are in the magazine's current issue, will be updated each six months.

The current results hold some surprises.

Dean Witter Developing Growth fund, for example, scored an A+ rating, though the fund was up only a modest 5.9 percent in 1992.

The reason for such surprises, Mr. Montgomery said, was that past performance was really no indication of how the stocks in a fund would do in the future.

Many stocks are hot one year but not the next, with biotech and international funds being some of the most recent examples.

Although Financial World's new tool might be useful, most pillars of the mutual fund industry said they remain skeptical until the indicator proves its accuracy over time.

Michael Lipper, who heads Lipper Analytical Services, which monitors mutual fund performance, said the system's accuracy was only as good as Wall Street analysts' forecasts.

"You're going to be as accurate as the blue chip consensus on the economy. On average, you may be right, but very often you'll be wrong," he said.

Another weakness: the reliance on earnings forecasts. They have a time horizon of three to six months, even though most people tend to invest in mutual funds for the long term.

In addition, funds often change their stock holdings fairly often, meaning that the new indicator could be off target even before it's published.

Regardless of the predictor's success, it is evidence of the growing prominence of mutual funds, which now hold $1.6 trillion in investors' money, said John Rekenthaler, publisher of Morningstar Mutual Funds newsletter.

"There's nothing wrong with the idea if it causes people to ask questions about their funds and get more information," Mr. Rekenthaler said. "Predicting, however, is a riskier game."

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