Warning given on index funds

Price vice chairman says investors should keep risks in mind

Mutual funds

September 30, 1999|By Bill Atkinson | Bill Atkinson,SUN STAFF

A top executive at T. Rowe Price Associates Inc. warned yesterday that investors should be careful about putting too much of their money into mutual funds that mirror stock indexes.

Those funds, which mimic indexes such as the Standard & Poor's 500 stock index, have been huge hits with investors.

"We think people need to be quite cautious about indexing," said James S. Riepe, vice chairman of the Baltimore-based mutual fund company. "It is not something you go into without regard for risk."

But Riepe, who addressed financial planners, 401(k) consultants and retirement plan sponsors yesterday at Price's annual investment symposium at the Hyatt Regency Baltimore, didn't advise swearing off indexing. Rather, he said, investors should be aware that the risks may be increasing.

The S&P 500 index is being driven by a narrower group of stocks. Last year, 10 stocks accounted for 40 percent of the index's gains, he said.

"It is no longer your father's Oldsmobile," Riepe said.

He worries that investors appear to be counting on getting big returns, but have little regard for risk.

"The word risk has dropped out of the vocabulary," he said.

While Price has been growing, larger mutual fund companies, such as Fidelity Investments, Vanguard Group and Janus, have been swallowing much of the new money that is being invested.

Fidelity and Vanguard offer large index funds, while Janus offers growth funds and funds that focus on fast-growing technology companies.

Price, on the other hand, sees itself as a diversified company that hasn't chased the hot sectors of the stock market. Riepe said his company is sticking to its more conservative, low-risk style.

"We believe in below-average risk," he told the audience. "We do, I think, consistently well vs. the competition."

Later, Brian C. Rogers, president of the T. Rowe Price Equity Income Fund and the T. Rowe Price Value Fund, said Wall Street has become short-sighted and harsh with companies that disappoint investors with weaker-than-expected earnings.

He pointed to Maytag Corp, which saw its shares plunge 26 percent Sept. 10, wiping out $1.3 billion in market value, after the company warned that its second-half profit would be lower than expected.

And Avon Products Inc., which makes and sells beauty products, saw its shares fall nearly 28 percent to $25.8125 yesterday, after warning that fourth-quarter profit would fall below expectations.

On the other hand, companies such as eToys Inc., an online seller of toys, have been rewarded even though they don't have track records, Rogers said. eToys has 300 employees and one store, and had revenue of $35 million for the first quarter. Its market capitalization is $4.5 billion.

That's more than Toys `R' Us' market cap of $3.7 billion. Toys `R' Us had $11.2 billion in revenue for the same period. It employs 68,000 and has 1,481 stores.

"There is a lot of very short-term behavior going on," Rogers said. "It is a crazy world."

Pub Date: 9/30/99

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