Don't bet your fortune on a newsletter's advice PERSONAL FINANCE

MUTUAL FUNDS

February 21, 1993|By WERNER RENBERG | WERNER RENBERG,1993 By WERNER RENBERG

George Bush had just been inaugurated when Phillips Publishing of Potomac solicited subscriptions for the Mutual Fund Investing newsletter by mailing a leaflet with the headline: "Bush's Secret Plan for the U.S. Economy."

President Bush's plan, Editor Jay Schabacker confided to potential subscribers, was to get an "overdue" recession over with early.

"Just as [President Ronald] Reagan got his recession out of the way early in his first term, leading to a boom and economic prosperity in time for his second election . . . Bush will try to do the same," he wrote. "And he will be sure to get his way because . . . Alan Greenspan . . . wants to help Bush win again in '92. . ."

Events didn't exactly follow the script. The recession didn't start until July 1990. While the Business Cycle Dating Committee determined last December that the recession had ended in March 1991, we're not yet in a boom. And you know where George Bush is these days.

But then, people who buy mutual fund newsletters probably are more interested in advice on making money than in political forecasts.

How profitable is that advice?

Judged on the basis of the newsletters' model portfolios -- recommended fund purchases and sales -- many have disappointing records.

According to the latest report by The Hulbert Financial Digest, an Alexandria, Va.-based newsletter that analyzes the performance of newsletter portfolios, 49 newsletters recommended a total of 127 different model fund portfolios for 1992.

Of the 127, the total returns of only 21 beat the 7.6 percent return of the Standard & Poor's 500 Index. And as many as 32 portfolios lagged behind the 3.5 percent returns that subscribers could have earned from risk-free Treasury bills, including 12 that had losses.

Twenty-nine letters had recommended a total of 57 portfolios for as long as five years. Hulbert calculated that only six exceeded the S&P 500's average annual return of 15.8 percent. Twelve had returns below the 6.3 percent of T-bills, including three that lost money.

And these figures don't take into consideration the income tax consequences felt by readers who complied with all recommendations.

Nor do they reflect the levels of risk that characterized the portfolios. Whether these were acceptable or excessive would have varied among investors, depending on their circumstances and goals. If, for example, you wanted an equity fund portfolio that was 20 percent less volatile than the S&P 500, its 5-year average return should have been at least 12.6 percent.

When you study fund newsletters, you'll see that there's no one path to investment success -- something that shouldn't surprise you. Here are some of the ways in which their approaches differ:

* In diversification strategies -- whether to invest in several funds or to concentrate in one. And, if the latter, whether to be in a one-industry (sector) fund or a diversified one.

* In fund selection techniques.

* In whether and how well they practice market timing. That is, whether to stay fully invested and, if not, whether decisions to get out of the market are timely.

Like a number of his competitors,Editor Jack Bowers of Fidelity Monitor chooses from among Fidelity's 35 Select Portfolios for his Select System. Since 1988 he has based selections on moving averages of fund share prices instead of industry analysis. Relying on only one fund at a time and switching often, he found performance improved considerably despite the high risk.

For his Growth Model, in which he remains fully invested, he chooses from two to four of Fidelity's diversified equity funds. The latest mix: Equity-Income II, 62 percent; Trend, 38.

The Fidelity Select Portfolio of Timer Digest also is invested in one fund at a time, but its editor, Jim Schmidt, applies market timing. Schmidt monitors the signals of 100 market timers, including other newsletter editors, and bases his recommendations to buy or sell on a consensus of the top 10.

"I don't try to persuade people that timing works," Schmidt says, "but no one has convinced me that buying and holding is better."

Another market timer, Charlie Hooper of The Mutual Fund Strategist, recommends three Fidelity Select Portfolios at a time for his Sector Portfolio. He left Fidelity for Financial Strategic Portfolios a few years ago when Fidelity sought to limit switching frequency. He returned last September because he had found Financial's choices too limited. His Diversified Growth Portfolio also is in three funds, currently Gintel, Neuberger and Berman Guardian, and Oakmark.

Eric Kobren of Fidelity Insight and Sheldon Jacobs of The No-Load Fund Investor offer more diversified models of stock and bond funds and avoid market timing. Kobren's Growth and Growth & Income Portfolios are both invested in five Fidelity funds. Jacobs' Wealth Builder is in nine.

Says Jacobs, "My portfolios are meant to be complete investment programs."

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