Some major performers have slipped toward bottom of the short-term list


April 16, 1995|By Boston Globe

When it comes to long-term mutual fund performance, you do not need a score card to tell the players. The big names have become familiar through years spent atop the return lists.

Fidelity Magellan, Vanguard Windsor, the Lindner Fund and other brand names have virtually locked themselves into lofty positions. Thanks to long-past superior performance, poor short-term returns can't knock them from their perch.

But a number of long-time winners have been showing up in strange places lately -- at the bottom of quarterly and yearly return lists.

It's a trend that industry watchers say should make investors guarded about pursuing an investment in an older superstar fund. Those who chose a fund based on long history may be disappointed in the future.

"If you bought those funds hoping to get the No. 1 performance over the next 10 or 15 years, sell the fund," said Eric Kobren, editor of Fidelity Insight and FundNet Insight, two Wellesley, Mass., newsletters. "It's as simple as that. These funds are not going to keep doing that well -- constantly beating the averages by so much that they stay atop the charts -- forever. They can't."

Managers of big funds acknowledge that no winning streak lasts forever, but insist they can still produce the big returns. Most highlight good midterm results -- above-average gains for the last five years -- as proof they haven't lost their touch.

And many of the old-line funds remain favorites with ranking agencies like Morningstar, which considers both the strength of returns and the risks a fund takes to get them. "If they maintain that good star ranking . . . they can say they are still doing a good job," says Avi Nachmany, who tracks the fund business for Startegic Insight in New York.

Indeed, a look at the list of the top 25 funds for total return over the last 15 years shows that nearly four out of five has earned one of Morningstar Inc.'s highest rankings.

At the same time, however, only five of those top 25 performers were in the top third of their fund class during the 12 months ended Feb. 28. Ten of those funds failed to finish in the top 40 percent of their class in the last three years.


* The Lindner Fund, No. 15 on the 15-year total return chart, was among the 15 worst growth funds during the first quarter of 1995 and has underperformed the Lipper Growth Fund Index over the last 10 years.

* Berger 100, a high flier in the 10-year return standings, is among the worst-performing growth funds for the quarter.

* CGM Capital Development -- the fund with the second-best total return over the last 15 years -- narrowly escaped the quarterly-losers list among growth funds, but it was the second worst of more than 650 growth funds last year.

* FPA Paramount, among the top dozen on the 15-year total return list, sits near the bottom of growth-and-income funds for the first three months of the year.

Observers cite a variety of reasons for the superstars' less-than-stellar recent performance.

Fifteen years ago, the fund world was small and it was easy to top the charts. A fund's winnings lured more investors during a good time for growth.

Today, there are about 5,000 funds, most of them smaller and able to profit from quick strategy shifts, while the big funds can no longer move to the head of the class with one or two good hits. Rules capping how much a fund can invest in a particular stock force these funds to diversify, and the greater spread of holdings reduces the impact of quick hits.

Only two funds atop the 15-year return chart, Mutual Shares and Sequoia, placed in the top 10 percent of their peer group for the most recent one- and three-year periods.

Another major shift has come among fund managers. Of the 25 funds with the best long-term performance, 12 have changed managers at least once in 15 years, and manager John Neff has announced his plans to make it a majority when he steps away from Vanguard Windsor late this year.

A change in managers often translates directly to the bottom line. Peter Lynch, who built Fidelity Magellan into a powerhouse, was renowned for avoiding the very technology stocks that current manager Jeff Vinik adores. Technology helped Magellan to a robust year in 1993, but contributed to a poor year in '94.

"Sometimes a manager gets wed to a particular style and times change and their fund just can't keep up, other times it is a new manager who brings in a new strategy that just doesn't work," Mr. Kobren said. "It's kind of a double-edged sword, and we know that makes it hard for a fund to stay on top."

But size itself is seen as a handicap by many.

"It is hard to manage several billion dollars, and funds that have been around 10 or 15 years and had some success also have that size," said Thurman L. Smith at Equity Fund Research. "Long-term results are nice to look at, but they aren't very useful in predicting the future."

Still, experts suggest that investors considering long-term superstars may be satisfied, so long as they lower expectations from the historical data.

"If a Fidelity Magellan -- or some big fund like it -- averages better than 50 percent of its peers and consistently beats the [Standard & Poor's 500 Index] by two or three or four percent, it has done a phenomenally good job," Mr. Kobren said. "That's the kind of return people should invest in these funds for, not the outrageous numbers of the past.

"If that's not good enough for you, then get out; these funds probably will never do that well again."

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