With its stock funds struggling to match peers, Touchstone strikes gold with bonds Cincinnati firm places 122 out of 131 funds tracked by Lipper

September 01, 1996|By BLOOMBERG BUSINESS NEWS

CINCINNATI -- Centuries ago, the touchstone, a fine-grained stone, was used to test whether an object was pure gold.

"We hope we'll help our customers strike gold," said Edward Harness Jr., president and chief executive officer of the Touchstone family of mutual funds.

Well, sometimes perhaps. Its stock funds have had a rocky time, under-performing their peers. When it comes to some of its bond investments, though, the Cincinnati-based fund company has done much better -- golden, in fact.

The up-and-down performance of Touchstone during its first two years of operations indicates how difficult it can be for the new kid on the block to surpass the results of more experienced fund companies.

Touchstone's emerging growth fund has returned 0.85 percent during the past 12 months, placing it 122 out of the 131 funds tracked by the research firm Lipper Analytical Services Inc. By contrast, the average "midcap" fund returned 11 percent.

"Sometimes new companies have problems with their fund performances because they feel pressure to post strong results from the beginning," said A. Michael Lipper, president of Lipper Analytical.

What separates Touchstone from many of its rivals is its management strategy -- preferring to farm out its stock and bond funds to managers at other companies. Most fund companies manage their investors' dollars in-house as a way to keep a tight rein over the stock- and bond-pickers.

"The idea has merit if the company can post returns good enough to overcome the higher expenses involved in farming out the management of your investors' assets," said Lipper.

Touchstone's flagging emerging growth fund employs two managers for the investment -- one uses a more aggressive growth style and one manages in a cautious, value-oriented manner, executives note.

"The fund is not performing all that well in the value style but it is performing well in the growth style," said James Waters Jr., marketing director of Touchstone.

Its international equity funds returned 6.7 percent and ranked 212 out of 302 funds in that category, Lipper said. Touchstone notes that its growth and income fund "is in the upper quartile," Waters said.

According to Lipper, Touchstone manages $18 million in equity funds and $14 million in fixed-income funds.

Touchstone also manages $70 million in variable annuity accounts for individual investors. Touchstone's parent is Western Southern Life Insurance Co., based in Cincinnati, which manages $9.6 billion in total assets.

John Rekenthaler, editor of Morningstar Inc.'s publications, said he reckoned that Touchstone might have a hard time building assets because the company sells its load funds through brokerage houses.

"Good luck trying to increase your asset base," Rekenthaler said. "It's a losing strategy because there is so much competition from bigger, more established fund companies who sell their funds by using the same method."

Touchstone has managed a better record with bonds than equities. Its Touchstone Inc. Opportunity, a junk bond fund, was No. 1 out of 141 funds during the past 12 months. It returned 23.97 percent, versus 9.89 percent for the average junk bond fund, Lipper said. The fund contains $2.4 million in investors' assets and uses outside managers.

"We hire outside managers because we want them to be independent thinkers," said Harness. "We don't want to have a big investment in a single manager, like a lot of fund companies. We want to be able to pull the plug on a manager at any time."

He has an example of a fund that has been having problems lately. "Look at Magellan," he said of the huge Fidelity fund whose performance has declined and whose assets fell by $3.5 billion -- or 6.4 percent -- in July. Magellan now has $54.97 billion -- a nice problem to have, some might say.

Still, Harness says he is not jealous.

"Magellan has a lack of flexibility because it has grown so big," he said. "It's hard for Magellan to move in and out of positions."

At the same time, Harness's partners concede that the industry's problems have affected Touchstone, too.

"It has been very difficult to bring new money into a fund these days," said Roger Lanham, senior portfolio manager of Ft. Washington Investment Advisors in Cincinnati. The company manages Touchstone's fixed-income funds.

Lanham said Touchstone has come into existence at a tough time when it comes to outperforming rivals.

"It has been a difficult market for fixed-income investments because the market is extremely liquid and that makes it tough for our strategy of sector rotation," Lanham said.

Lanham said his current strategy in overseeing Touchstone's variable annuity investments is to run a "neutral strategy regarding duration and underweight government securities."

His largest overweighting position is in asset-backed securities, Lanham said. "That's the fastest way of adding value on a yield basis."

Pub Date: 9/01/96

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