10 years is a long time to gnash your teeth Giftrust investors are locked in

Mutual funds

July 19, 1998|By Jerry Morgan | Jerry Morgan,NEWSDAY

Three years ago, Bernard Drucker of East Meadow, N.Y., a financial consultant for more than 40 years, decided to invest some money for one of his grandchildren. So he checked out various funds and settled on American Century's Giftrust.

Now, Giftrust is one of those investments that reminds you of the Eagles song "Hotel California": "You can check out anytime you want, but you can never leave." That's because the mutual fund is a trust, and you agree to leave your money in for at least 10 years. You cannot take it out earlier, no matter how the fund is doing. And Giftrust, despite its excellent returns in the past, is having a horrible time, magnified by its contrast with the greatest three-year stock market performance in history.

From 1992 to 1994, Giftrust outperformed its small-cap fund category, 75.98 percent to 32.72 percent, according to figures from Lipper Analytical Services Inc. But, from Jan. 1, 1995, through June 18, 1998, that reversed. Giftrust was up 39.66 percent, 38.3 percent of it in 1995. The average small-cap fund was up 89.86 percent in the same period. This year, the fund has lost about 3 percent.

In sharp contrast, one fund that Drucker points to, the Vanguard 500 Index Portfolio, is up 164 percent for that period of more than three years.

"I feel trapped," Drucker said. "I don't always expect 15 percent a year, but they didn't even make 1 percent. I didn't make a nickel. The market is phenomenal. But even if it doesn't keep on being this good, I can't make up the money. I can't get out, and I can't transfer out of the fund into another fund in the same family. They don't allow it."

Drucker isn't the only one annoyed by the fund's performance. "People are coming out of the woodwork; we are getting our fair share of calls," said Gunnar Hughes, American Century's spokesman. "People feel stuck in the fund. On the other hand, we hope this all washes out over time."

A lot of people are stuck in the fund until at least 2000. The fund had $25 million in 1990 and now has more than $1 billion.

It wasn't only investors who were surprised. John Rekenthaler, research director of Morningstar, the Chicago company that rates funds, said, "A lot of us were recommending the fund three years ago because of its record."

"People were buying Giftrust for their kids because it looked like a sure thing, and this points out there are no sure things. Clearly, this is not a fund we would recommend for new investors now."

Hughes said the fund's problems included "overweighting tech stocks, and the ones we had blew up." The Asian crisis clobbered tech stocks in the last quarter of 1997, he said. Last year was very volatile for the fund, which lost 21 percent in the first quarter, was up 46 percent in the next two quarters, then down 15 percent in the fourth quarter for a 1 percent loss for the year.

The fund has a new portfolio manager, John Seitzer, and it has diversified more, Hughes said, with 25 percent in technology stocks instead of 35 percent or 40 percent. But, as Drucker points out, it will be almost impossible to make up what the S&P index funds have done in the past three years, even if small-cap funds strongly outperform the large-company funds. That's because in that three-year period, an investment made in 1995 in an S&P 500 index fund has risen 160 percent.

Speaking of index funds, those of you in the $60 billion Vanguard 500 Index Portfolio should reread your prospectus. You are not allowed to change to another fund merely by making a phone call, as with other funds. The fund prohibits that to discourage market timers from jumping in and out as the market moves.

That raises transaction costs for all shareholders, so Vanguard requires written instructions to exchange, though not to redeem, the fund.

In the event of a bear market, it may take you longer to get out, depending on mail delivery and how long it will take to process your request if there is an avalanche of mail.

At least that's the case for those of you who are regular taxable shareholders. If you own the fund in a 401(k) account or an Individual Retirement Account, you can get out of it with just a call. But Vanguard spokesman Brian Mattes said 401(k) investors aren't market timers, and they can't pour cash into those plans because they are limited by law. Most of that money is inert, Mattes said.

Pub Date: 7/19/98

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