Lively times in the small cap world

Mutual funds

August 04, 1996|By Jerry Morgan | Jerry Morgan,NEWSDAY

Riding a roller coaster inside one of those amusement park ersatz mountains, never knowing what turns or dips to expect, is probably less scary than watching your investments in small-company stocks careen hither and yon in broad daylight.

"We didn't enjoy the trip down; sometimes it can make you sick," said Peter Kris, managing director of the Van Wagoner Funds, three small-cap funds.

In January, the small-cap market was down about 12 percent, then it took off, at least until June when it crashed again. Between June 5 and the small-cap sell-off of July 23, the Nasdaq composite index dropped about 16 percent. During the same period, according to Lipper Analytical Services Inc., the average small-company fund dropped 15.9 percent.

And, for the past couple of weeks, it has been possible to watch the NAV -- the value of each share in your fund -- go up or down 4, 5, 10, 12 percent in a week. Sometimes 4 or 5 percent, either way, in a day.

Historically, the volatility of the small-cap market is nothing new. A study by T. Rowe Price's New Horizons Fund found that in the up cycles for small-company funds from October 1976 to June 1983, there were four separate mid-cycle corrections of 18 percent to 24 percent. In the current cycle, which started in October 1990, this is the fourth correction of more than 15 percent.

So, as in any good horror show, investors are covering their eyes with their hands, peeking through splayed fingers and screaming. But only a few seem to be pulling their money out of stock funds.

Industry sources reported a $4 billion outflow from stock funds in the week ending July 19, which sounds high, but really doesn't register when the the assets of stock mutual funds total $1.526 trillion. And much of that withdrawn money went into money-market mutual funds, and will probably be reinvested when the markets calm down.

No one is sure what is causing the wildness of the fluctuations, though all admit that the valuations on many technology stocks were higher than their CEOs' fantasies. That has kept some investors out of the market for a while.

Garrett Van Wagoner, who started his three small-cap funds in January, had about 25 percent in cash because he thought valuations were much too high. That cash cushion also helped soften the dips his funds experienced, compared with other fund managers. "In June the market was down 7.7 percent, but we were only down 4.4," Kris said.

Still, when Microsoft reports earnings up 52 percent, ahead of even analysts' expectations, and still loses more than $7 a share in one day, one has to wonder.

"People get caught up and the expectations are very high. So Microsoft beats the expectations but not by too much, and some people dump it," Kris said.

"The problem of 1996 is that the analysts' expectations were just too damn high," said George Novello, who manages Smith Barney's special equities fund. "There is the same focus on short-term performance as there was before."

Novello and other investment experts said that many young money managers had never seen a down market. "They don't know how to react to it, and so you have some panic responses to earnings that are not the world's greatest," he said.

Glenn Fogle, who manages Twentieth Century's Giftrust, which buys small-cap stocks for investors who agree to put their money into the fund for a minimum of 10 years, said: "The small-cap stocks are less well followed by Wall Street and a lot of people don't have a lot of conviction about them, so they go down quicker. We ran into a head wind and we are down about 12 percent in the last two weeks. We've just been clobbered but we are only off a couple of percent for the year."

With the Nasdaq dropping more than 32 points July 23, some fund managers began buying. "We had a big buying day a couple of weeks ago when the Dow dropped," Kris said. "Prices are down to levels where the valuations are beginning to look good."

Novello, who has also been buying, explained: "I expect the market will come back. This is a correction, not a bear market."

Pub Date: 8/04/96

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