Why analysts' sharp insights on TV often don't match funds' performance

MUTUAL FUNDS

March 20, 1994|By WERNER RENBERG | WERNER RENBERG,1994 WERNER RENBERG

"Why is it that the mutual funds of some of the biggest and most recognized experts often have mediocre performance?" a reader asks.

"A classic example is Marty Zweig. He's recognized by [Mark] Hulbert [of the Hulbert Financial Digest] as one of the best, but his fund is average. What's going on with these guys?"

While any fund manager can have an off year, this reader makes an inappropriate comparison: He doesn't distinguish between picking a few stocks and managing an equity mutual fund portfolio.

They are important distinctions to keep in mind when you get the impression that an "expert" has an impressive stock selection record and you'd like to invest some money in his/her fund.

People such as Martin E. Zweig, as well as Eddie C. Brown, Frank A. Cappiello, and Elizabeth B. Dater, have become widely known because of their frequent TV appearances, while their mutual funds have generally attracted little attention.

They established their names in part by making first-rate stock recommendations for the coming years on year-end programs of Public Broadcasting's "Wall $treet Week with Louis Rukeyser."

Zweig also offers a model portfolio in his newsletter, the Zweig Forecast.

0R Consider the total returns of the securities recommended on W $W by these panelists for 1993. Ranging from Dater's 37.1 percent to Brown's 25.7 percent, all four were well ahead of the average 10.1 percent total return for the Standard & Poor's 500 Index and the 18.9 percent of the Russell 2000 small company stock index.

But the panelists' funds? While Dater's Warburg Pincus Emerging Growth Fund did beat her W$W stock picks for the past five years (17.8 percent annually vs. 16.7 percent), none of their funds did as well as their stock picks in 1993.

"For Wall $treet Week you look for top appreciation," Cappiello says. "There is the tendency to be more aggressive, and 1993 was a great year in which risk-taking paid off. You can't do that in funds."

Under the rules governing the W$W picks, panelists are limited to making 12 recommendations, but they can -- and do -- elect to make fewer than 12. Moreover, they are not limited to stocks. They may recommend bonds, options, commodities -- "anything," as producer Rich Dubroff puts it, "as long as there is a recognized way for Bloomberg Financial Markets (a financial news service) to track it."

Once they recommend what to buy (or sell short) for a coming year, they can't make changes. Thus, they need to concentrate on positions that, if held for one year, could maximize total return.

Running funds is different, starting with their longer horizon.

For adequate diversification, funds invest in many more than a dozen securities, which tends to inhibit returns. Fund managers can add or eliminate positions at any time, depending on changes in their assessment of stocks' (and bonds') prospects as conditions change.

While they may invest in bonds, if fund policies permit, they may not invest in other things that W$W allows. They also may need to cope with large inflows and outflows of cash.

Nor can you forget that funds have different investment objectives (growth, income, and so on) that managers must pursue. And since prices of different types of investments don't move in lock-step, you can't compare managers' performance with just one benchmark.

Despite their different objectives, Zweig's three equity funds with records exceeding one year -- Zweig Appreciation, a small company fund, and Zweig Strategy and Priority Selection List, large company funds -- had similar returns of 14 to 15 percent last year.

In contrast with his W$W picks and his newsletter's model portfolio, Zweig doesn't make the selections for the funds. He provides only asset allocation advice for Zweig Strategy and Appreciation, which are run by David Katzen (and for a new asset allocation fund). Zweig/Glaser, the investment manager, contracted with Ned Davis Research to run PSL after it was acquired in 1989. Ned Davis allocates assets while Joseph Kalish picks the stocks.

Cappiello, president of McCullough, Andrews & Cappiello, started Cappiello-Rushmore Emerging Growth, Growth, and Utility Income in 1992 after funds that he had managed since 1983 for a group of regional brokerage firms were sold to the Fortis Financial Group.

Dater, who credits her W$W record in part to "cherry picking the best ideas of all [Warburg Pincus] managers," has managed Emerging Growth since its inception in 1988, beating the Russell 2000 for the past five years but lagging it slightly last year.

Brown, who led all W$W panelists for the past five years with an amazing average annual return of 35.5 percent, formed Brown Capital Management in 1983 when he left T. Rowe Price to go on his own. He started his Balanced, Equity, and Small Company Funds in 1992.

Their 1993 results were disappointing, though, as his growth stock strategy ran head-on into the superior performance of value stocks.

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