Investors told to lower their expectations

Mutual funds

January 04, 1998|By Jerry Morgan | Jerry Morgan,NEWSDAY

Once again, investment professionals are urging investors, spoiled by the best three-year stock market run in history, to lower their expectations.

Coming off the tremendous, if somewhat unexpected, performance of stock funds in 1995, mutual fund experts predicted 1996 would see something closer to the market's historical return of about 11 percent. They were wrong.

Then, a year ago, the experts looked at history -- which had never seen three 20-percent-plus years in a row -- and again predicted a return to the norm. Despite great volatility, including a one-day drop of 554 points in the Dow Jones industrial average, the market has had a third straight banner year.

So the pros are trying again.

"I don't think we will see double-digit returns [in 1998]," said Ben A. Hock Jr., director of research for John Hancock Advisers in Boston. "They will be single-digit, but not hat-sized, about 9 percent."

One reason for lower returns might be disappearing inflation. Historically, returns on stocks have been 6 percent to 7 percent a year, plus 3 percent to 4 percent inflation. But with inflation expected to register at 2 percent or less, returns are likely to be affected.

The good year that's concluding was held back by a bad fourth quarter linked to severe economic problems in Asia. Lipper Analytical Services Inc., a Summit, N.J., firm that tracks the industry, said the average equity fund has dropped 6.07 percent since Oct. 1, though still posting a gain of 15.08 percent for the year. The general equity category, which excludes world and sector funds, was up 21.67 percent for the year through mid-December.

Financial-services funds did much better than average for the year, spurred by more than $178 billion in new investment money. The average increase was 41.3 percent through mid-December, making it the only sector to exceed the Standard & Poor's index fund category.

Given these kinds of returns, many stock investors are reluctant to diversify into bonds and bond funds, as investment pros often recommend, though some movement is being seen. What worries fund officials is that investors believe returns will always be this high.

"People are greedy. They have soaring expectations and probably need a sustained period of bad news," said Steven Treadway, executive vice president in charge of retail funds for PIMCO Funds in Stamford, Conn., who urges investors to diversify, sometimes without success.

"My 83-year-old mother has 100 percent of her pension fund in stocks. When I noticed that, I told her she should diversify, but she just blew me off," he said.

Still, fund officials say the Asian blood bath -- Pacific region funds are off more than 30 percent for the year -- and the brief but steep October sell-off seem to be leading some investors to rethink what they're doing.

"We're seeing new money going into bond funds," said Brian Mattes, a principal at Vanguard in Valley Forge, Pa., "but they aren't selling their stock funds."

The move to bonds is purely defensive and still relatively small compared with cash flows into stock funds. But bond funds have been moribund during the bull rush.

Bond fund managers are lonely people, said Hancock's Hock. That may be turning around. More than $8 billion in new money went into bond funds in October and November as financial vTC advisers urged investors to diversify out of stock-fund-only holdings into cash and bonds. Some expect the total return on bond funds, including interest and price appreciation, to be close to equity fund returns in 1998.

Investment pros expect small-cap stock funds, which have little exposure to international problems, to do well this year. In addition, because small companies are more vulnerable than large companies to interest-rate swings, the small companies should continue to benefit from low rates.

Few fund managers expect large-company stocks, which have led the bull market for the past three years, to continue to set the pace.

For investors who don't mind risk, funds linked to Asia could be interesting. More than one manager has pointed out that the Chinese character for crisis is made of the characters for both danger and opportunity.

So, while investors might want to seek some diamonds at bargain prices, "You are going to need a strong stomach," said Elizabeth Allan, who manages Scudder's Pacific Opportunity Fund, down almost 34 percent for the year. It may take about two years to see good results, she said.

Pub Date: 1/04/98

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