Growth funds a good bet, but others worth a look

Revival: International and emerging-market funds could gain ground.

Mutual funds

January 23, 2000|By Eileen Ambrose | Eileen Ambrose,Sun Staff

If you want to know which mutual funds are likely to capture investors' dollars this year, you might want to look at 1999.

Investors, explains Vanguard Group Chairman Jack Brennan, tend to buy funds that performed the best in the previous year. "Trailing performance is such a powerful determinant," he said.

For years, investors have thrown money at growth funds, particularly those investing in large technology companies. And they have been rewarded with healthy returns.

The average return on large-cap growth funds, for instance, was 34.46 percent in 1998 and 38.63 percent in 1999, according to Morningstar, a Chicago firm that tracks mutual funds.

"Growth funds have been the place to be. Large-cap technology growth funds have been a great place," Brennan said.

That may likely continue this year, some financial experts say -- although others predict that growth funds may lose some steam if high prices drive investors away from large technology stocks.

The outlook appears to be bright for international, emerging-market and small-cap funds, whose performance markedly improved in 1999 over the year before. And it may finally be the time for the long-time wallflowers -- value funds -- to bloom. "You will see some of the value stocks perform better, and see a lot of these growth-oriented stocks, like the Internet stocks, not perform as well," predicted James S. Riepe, vice chairman of T. Rowe Price Associates Inc. in Baltimore.

Overall, investors' ardor for mutual funds cooled last year.

Money flowing into funds was down compared to 1998. In the latest figures available, net cash flow into mutual funds for the first 11 months was $330 billion, compared with $479 billion for the same period in 1998, according to the Investment Company Institute (ICI) in Washington.

Reasons vary for the overall decrease, experts say. It's hard to keep up the feverish buying spree of 1998, and some baby boomers may be paying college tuition rather than buying investments now. Also, after such a long bull market, some investors may have decided to buy stocks directly, figuring they can pick stocks as well as a professional money manager can.

"Over the last 12 to 18 months, you could own 10 stocks and get the majority of the return of the S&P" 500, said Bob Dineen, director of mutual funds marketing for Merrill Lynch.

"People just sat back in '99," said Tal Daley, senior vice president and director of Legg Mason Funds marketing. With the Federal Reserve raising interest rates three times last year, investors parked their money in certificates of deposit and money markets until they had a clearer idea of where to invest, he said.

Growth funds remained the funds of choice last year, with cash flow through November reaching $90 billion, compared with $64 billion for all of 1998, according to ICI.

But interest rate hikes dampened enthusiasm for bond funds. "Bond flows tend to move in the opposite direction of interest rates," said Brian Reid, senior economist with ICI. Last year, cash flow into bond funds totaled $8 billion through November, compared with $71.3 billion for the same period the year before.

And investors initially shied away from international funds, which took a drubbing in 1998 because of economic problems in Asia, Russia and Latin America. However, in the latter half of 1999, money started flowing back into the funds.

By the end of November, investors had poured a total of $3.4 billion into international funds, ICI reported. That compares with $831 million flowing into international funds in all of 1998.

While large-cap growth funds dominated in 1999, other funds also saw a revival.

The average return on foreign stock funds, for instance, rose to 44.31 percent, compared with a more modest gain of 12.6 percent in 1998, according to Morningstar. Small-cap growth funds returned an average of 65.85 percent, compared with 5.76 percent in 1998.

International funds may continue to build on their gains of last year, many believe. Merrill Lynch's Dineen said long-term investors should consider funds investing in Europe, Japan and the Far East.

"Small- and mid-cap growth may still have some room to run. Whether it will happen [this year], that's the catch," said Peter Di Teresa, senior editorial analyst for Morningstar.

Some investment experts also say value funds, which invest in stocks that have temporarily fallen out of favor, are due for a comeback.

"If you look at the last four to five years, growth outperformed value," Dineen said. "That's the longest period of time one style of investing has outperformed another ever."

Legg Mason, for instance, is so confident that value funds may revive that last fall the Baltimore-based company launched its second value fund.

To investors wondering which funds to choose, experts warn against making a decision based on which were last year's hot funds.

"If people would sit back and really look at the fundamentals of the world economically and make their judgment of where they are going to invest on that, then maybe they wouldn't have missed '99's big story," Daley said.

That story: emerging markets. Last year, according to Morningstar, emerging-market stock funds enjoyed an average return of 71.79 percent after a dismal loss of 27.02 percent the year before.

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