New managers learn pain in bull run

Mutual funds

October 26, 1997|By Jerry Morgan | Jerry Morgan,NEWSDAY

It is now 10 years after the 1987 stock market crash, and the number of stock mutual funds has more than tripled since then, to 2,915.

It is also roughly seven years since the end of the 1990 bear market.

All of which would seem to indicate that there are a lot of new

mutual fund managers who have never known a down market.

Executives at fund companies say there is no cause for alarm because there are always older, wiser managers around the office who have lived through market downturns. But Avi Nachmany, executive vice president of Strategic Insights Inc., a New York fund consulting business, says: "It may sound cynical to say that [fund] management always says there is oversight, but there is no substitute for experience. We can work to educate people, but risk has to be experienced."

Although there has been no general downturn since 1990 -- not counting the 1994 bond market debacle -- there have been enough declines in particular sectors of the stock market to provide some of those new managers with the requisite experience of a sharp decline.

"If you have been manager of a momentum growth fund, it has been a hellacious 18 months," said Don Phillips, president of Morningstar, the Chicago company that rates mutual fund performance.

Christine Baxter, the 29-year-old manager of the $1.8 billion PBHG Emerging Growth Fund, has experienced the depths of that year and a half. Her small-company fund, which is driven by expected company earnings momentum, had a horrible 11 months from May 1996 to April. "At the bottom, we were down 36 percent," she said, "but we have rebounded over 50 percent since then."

Baxter grew up in the business. The "B" in PBHG is her father, Chairman Harold Baxter. She started as a research analyst in 1991 and began managing the Emerging Growth Fund in 1993. In March 1994, the fund was down 18 percent to 20 percent, she said.

"There was a lot of downward volatility, but not as bad as 1997, when the small-cap market was hurt while the broader market was advancing," she said. So the impact of dropping through the floor was all the greater. "It is very unpleasant and uncomfortable, whether it is your first time or your 15th time."

Blaine Rollins, the 30-year-old manager of Janus' Equity-Income and Balanced funds, oversees about $400 million in assets. As a research analyst responsible for picking financial company stocks, he learned about bad markets when the bond market crashed in 1994.

"I felt real serious pain when the stocks I picked dropped 20 to 30 percent," he says.

Adam Hetnarski, 33, got his first bitter taste of the market when the money he began investing as a junior in college disappeared. "I lost a bundle when the market crashed in 1987," he said. Now he manages more than $800 million in Fidelity's Select Technology Fund and Advisor Technology Fund.

As a tech-fund manager for the past two years, Hetnarski has been riding a roller coaster. Tech stocks jumped and fell several times last year, including a chilling decline of 12.6 percent from May to July 1996, and dropped 12.2 percent from February to April of this year before climbing back.

"I have experienced negative cash flow [investors pulling their money out of the fund], but at each downturn, I did better and better," he said.

T. Rowe Price Small Cap Stock fund manager Gregory McCrickard first learned about the effects of long-term bad markets from veterans of the 1973-1974 bear market, which sent stock prices dropping 42 percent -- and worse, kept them at those levels for years.

McCrickard, 39, started in 1981, working for a pension-management company whose managers had been badly burned in the '70s. "They thought only an idiot would invest in stocks in 1981," he said. "All they wanted was hard assets, like real estate."

McCrickard became an analyst for Price in 1986 and says he "felt the full pain of 1987 and 1990."

What helped these managers get through their rough periods, they said, was the strong support of managers who had been there.

"You learn from past events and try to do better. You use the

people who have been through bear markets so you are ready," Hetnarski said.

Baxter said she relied on the advice of PBHG Growth Fund manager Gary Pilgrim. "You deal with it by surrounding yourself with experienced people who can provide leadership. Gary Pilgrim told me the most important thing was sticking to my [investment] discipline and not trying to change strategy every time the market moves. You have to accept under- performance and over-performance."

If the young managers are not all as inexperienced as some have feared, the same cannot necessarily be said for many customers. "It may not be how the managers do, but what the shareholders do," said Morningstar's Phillips.

What effect a sharp downturn has would depend on its duration, Phillips said. A sharp, brief crash like that of Oct. 19, 1987, may cause little panic, he said. "But if it is a drawn-out affair that gives the public enough time to be whipped into a frenzy by newsletters or managers who urge them to buy Treasury bond funds instead of stocks, and everyone else who preys on investors, then not only young managers will learn something. You may have managers in their 50s and 60s who will have to relearn some lessons."

Nachmany has more confidence in investors. "I will tell you my judgment has been that customers will not panic because they never do. Even in 1987, only one in a hundred [customers] reacted negatively," he said.

Pub Date: 10/26/97

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