Don't panic as the market falls, experts say


July 29, 1996|By Bill Atkinson

IN A ROUGH STOCK market, even the experts get bruised.

Take John Laporte, manager of T. Rowe Price's New Horizons Fund. Last year, he was named manager of the year by Morningstar Mutual Funds, a respected industry newsletter, after New Horizons returned more than 55 percent. Now, he looks mortal as his 36-year-old fund is taking licks with the drop in the stock market.

And what about those high-flying, high technology mutual funds that virtually coined money last year? As of July 24, only two out of 31 technology mutual funds had positive returns, according to a survey by Morningstar.

It's only natural to get jittery and wish you would have put your money into that 5 percent certificate of deposit at the bank when the market starts to tank.

But experts such as Laporte, while they understand their clients' concern, say investors have to keep their cool.

"Everybody has become spoiled in seeing stock prices only go in one direction over the past two years if not the past six years," said Laporte, whose fund has a five-year return of 192 percent through June.

"What people lose sight of is that corrections are a normal part of any healthy market's long-term evolution".

Healthy or not, jolts like the ones felt the past few weeks can be painful. Shareholders of companies traded on the Nasdaq have needed more than antacid tablets to make it though the last few weeks of agony. They've lost billions in recent months after the Nasdaq plunged more than 16 percent on July 24 after hitting a high in early June. Big names like Hewlett-Packard Co. and Motorola Inc. got whipped.

The leaders in this decline have been technology companies, which have been lurching back and forth from the winners' circle to the doghouse.

The PSE Technology Index, the benchmark in gauging the technology industry, has dropped about 25 percent from its peak of 230 points in May.

This has meant lean returns for investors in technology mutual funds. Just two funds in Morningstar's group have positive returns for the year: PBHG Technology and Communications with a 13.19 percent return from January to July 24, and Invesco Strategic Technology, 0.82 percent.

The damage to technology mutual funds has been swift. Fidelity Select Electronics returned a massive 69.40 percent last year, but from January to July 24 of this year it was returning a negative 3.88 percent. Going into July, Robertson Stephens Information Age fund was clipping along with a 15 percent return, but as of the 24th it was returning a negative 3 percent for the year.

And those are the returns of better performers.

Seligman Communications & Information A returned more than 43 percent last year, and now it's returning a negative 19 percent.

"That hurts," said Russel Kinnel, technology fund analyst with Morningstar. "They were heroes for 1994 and 1995 because they had a huge bet on semiconductors. That doesn't look so smart now."

Some funds had rough going even in 1995 when the market roared. Merrill Lynch Technology fund managed a 5.86 percent return in 1995, and this year returns have been a negative 16.35 percent as of July 24.

The fund invested in Japanese semiconductor makers and also bet big on Acclaim Entertainment Inc., publisher of the smash hit computer game, Mortal Kombat, Kinnel said.

Acclaim ran into trouble, losing $3.97 million in its fiscal third quarter, and the stock has yet to recover since the July 11 announcement.

"The market ripped out its heart and showed it to it," Kinnel said.

The carnage may not be over. Laporte believes the market still has a way to go before it hits bottom.

"I think that it has largely run its course, but my guess is maybe there is a little more speculative excesses to take out of the market. It wouldn't surprise me to see this correction go slightly further. It would be my guess that we are within 5 percent of the bottom."

But he doesn't see the market turning bearish because the economy is still strong, interest rates are tame and inflation is under control. It's the jolts and bumps along the way that keep the market healthy, he says.

"You need them because you get frothy markets that lead to speculative excesses," Laporte said. "Certainly, in the IPO [initial public offering] market the appetite of buyers was insatiable and newly public companies were going at ridiculous values. There is something wrong there."

Pub Date: 7/29/96

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