Momentum funds? They've sort of lost it

Investing

April 07, 1997|By Bill Atkinson

MOMENTUM funds are for investors with guts.

They are funds known for churning out huge gains one year, only to slide off the cliff the next. And these days, some of the best are scraping the canyon wall.

"It is painful watching this," said Robert G. Mewshaw, an investment counselor with Van Sant and Mewshaw Inc. in Lutherville, who closely tracks mutual fund performance.

"The momentum funds which have been so, so popular are being decimated."

Momentum fund managers load their portfolios with fast-growing, high-performance companies -- many of them high-tech firms -- hoping to profit as their earnings and share prices soar.

One whiff of negative news about a stock in the portfolio, and the fund manager dumps the stock and replaces it with another racy company.

The strategy has produced hefty returns for mutual fund shareholders, especially in 1991 and 1995, when the stock market sizzled.

But with the market trekking south -- it has fallen 7.89 percent since its high of 7,085 on March 11 -- shareholders of momentum funds have been punished.

Some of the biggest losers among large U.S. diversified mutual funds include: PIMCO Opportunity C, PBHG Emerging Growth and American Century-20th Century Giftrust.

PIMCO Opportunity returned a negative 18.88 percent from Jan. 1 to March 27 -- a dramatic reversal from returns of 41.53 percent in 1995 and 68.08 percent in 1991, according to Morningstar Inc., the Chicago-based mutual fund rating firm.

"The last six months have been pretty tough," said Phil Neugebauer, a spokesman for PIMCO Funds, which is based in Newport Beach, Calif.

He said the fund is "riding out a longer hiccup in the market than we are used to."

'A daring fund'

PIMCO Opportunity invests in businesses with market capitalizations of up to $1 billion.

Its managers like high-technology stocks, many of which have been battered for months.

"It's a daring fund," said Jim Raker, senior research analyst at Morningstar. "It is very aggressive.

"It ran up tech stocks in 1995 as high as 48 percent" of the portfolio.

PBHG Emerging Growth and American Century-20th Century Giftrust have faired little better.

PBHG returned a negative 18.48 percent over the same period, while Giftrust returned a negative 18.12 percent.

Glory years recalled

Both funds have had years when they sparkled.

PBHG, started in 1994, had its best year in 1995 with a 48.45 percent return.

Giftrust returned 38.32 percent in 1995, and it closed 1991 with an 84.91 percent return.

While many of the momentum funds are leading the pack of losers, U.S. diversified equity funds have little to brag about this year.

The average return for 2,300 U.S. diversified equity funds is negative 1.98 percent for the first three months of the year, Morningstar said.

That compares with average returns of 5.73 percent in 1996's first quarter and 7.33 percent in 1995.

New money slows

Investors have gotten the message about momentum funds.

The Investment Company Institute, the Washington, D.C.-based trade group that represents the mutual fund industry, said that in January $5 billion in net new cash flowed into aggressive U.S. equity funds. But in February just $802 million came into these funds.

Growth mutual funds experienced a similar decline. Investors pumped in $6.7 billion in net new cash in January, but cut their investment in half to $3.2 billion in February.

Mewshaw of Van Sant and Mewshaw says it's best for investors to take the conservative course.

"Don't stand in front of a moving freight train thinking you can stop it," he said.

Pub Date: 4/07/97

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