Long-term view changes picture of market shifts



Whether you are an experienced or new investor, you probably know by now that securities markets have a perverse tendency to translate good news -- such as continued low inflation, higher employment, and higher corporate profits -- into lower prices for stocks and bonds.

How else would you explain the pounding suffered in the first quarter by stocks, bonds, and the mutual funds that own them?

Being a rational investor, you may have supposed that, when stock prices decline, conservative funds invested in stocks of large companies that pay dividends would hold up better than small company funds, so-called "value stocks" would hold up much better than "growth stocks," and high- and medium-quality bonds would provide a refuge for money you don't want to risk in the stock market.

Since these notions appeared not to be holding up, you may have begun to have doubts about them as the quarter ended.

Lest you lose faith, it may be useful to consider the quarter's results in a long-term perspective and to look behind the numbers.

The return for the stock market, measured by Standard & Poor's 500 Index, was a negative 3.8 percent, pulling down the return for the past 12 months to 1.5 percent. Unlike 1993, when the S&P/BARRA growth index (made up of the 500's growth stocks) was swamped by the Value index, it was down only slightly more (minus 4.3 vs. minus 3.3 percent) in the last quarter.

For the 10 years ended March 31, however, the average annual rate remained over 14 percent -- and that's despite the fact that the market was down in as many as nine of the 40 calendar quarters.

If, as some have projected, the average rate in the 1990s is likely to come closer to the long-run average of 10 percent, returns in some years clearly would have to be below average. Over time, stock prices reflect profits, and these have been going up; those of companies in the 500 are estimated to rise 30 percent this year.

In the first quarter, general equity fund groups were down, on average, 3 percent or more, according to Lipper Analytical Services. Small company growth funds were off slightly less than the others, which would be consistent with the Russell 2000 index's drop of 2.7 percent being slightly less than the S&P 500's.

Whether equity funds beat or lagged the S&P index depended more on the sectors in which they were -- or weren't -- significantly invested than on whether they were in large or small company, or growth or value, stocks, Jeffrey S. Molitor, Vanguard's director of portfolio review, observed. "Sector differences really stood out," he said.

Thus, Molitor explained, a growth stock or small company stock portfolio could have benefited from a concentration in technology stocks -- or suffered without them -- while a value stock or large company portfolio would have been hurt by the plunge of utilities.

Among funds that did better than you might have expected during a market decline was Twentieth Century's Ultra. It was down only 1.8 percent -- largely due to the fund's technology and foreign holdings, Robert C. Puff Jr., the firm's chief investment officer, explained.

Funds concentrated in foreign stocks, on the average, were down 1 percent, hardly reminiscent of 1993's average pace of 39.4 percent and below the 3.6 percent total return of Morgan Stanley Capital International's Europe, Australia and Far East (EAFE) Index.

Within the group, performance varied, depending on where funds were invested. Those with large positions in Japan (up 16 percent), Finland, and Italy should have done well; those heavily in Malaysia and Hong Kong, whose markets were off over 23 percent, wouldn't have.

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