A look into the crystal ball in search of the biggest stories of the year ahead

Your Funds

Dollars & Sense

January 07, 2001|By CHARLES JAFFE

Past performance is no guarantee of future results, but that doesn't mean that what I'm about to say isn't going to happen.

Since 1995, I have started every year by forecasting the biggest stories in the fund industry for the coming 12 months. Over that time, about five of every seven calls I've made have come out right or darned close. (The rest, generally, have been premature, not wrong so much as ahead of their time.) Here's what my crystal ball - plus a lot of very smart industry watchers - suggests we'll see this year:

History repeats itself for performance chasers.

At the start of last year, money gushed into technology and Internet funds, which had posted huge gains in 1999.

It didn't matter to investors that many hot tech stocks had no earnings and no immediate hope of profitability, at least until the market tanked and tech-heavy funds took a beating.

With tech funds lagging, investors are turning to the biotechnology sector, the big winner last year. The trouble is that biotech is another sector in which profits and quality balance sheets are in short supply. As a result, these investors could be setting themselves up for another short-term fall.

Value continues to rebound, but nobody cares.

Value investing (in which managers buy underpriced stocks) suffered in the late 1990s, when the growth style (in which managers look for earnings and/or revenue growth) ruled the day. That trend changed last year; it should continue for much of this year.

But investors are so conditioned to big returns that potential gains in the low-teens just won't get them jazzed. As a result, not many investors will cash in on the value recovery.

A liquidity crisis.

My forecasting track record would be a lot better if I stopped saying this, as I called for liquidity crunches in 1995, 1996, 1997 and 1999.

There were isolated liquidity troubles in each of those years, but no big crunch. Still, I can't help myself.

The stock market is returning to fundamentals and punishing companies that aren't profitable, the bond market is tight and many companies face real trouble getting the financial backing they need to survive. Some funds will suffer as a result.

The "next Heartland." As readers of this column know well by now, two Heartland junk muni-bond funds blew up in 1999, due to pricing issues surrounding thinly traded securities. It's tough to top a 70 percent one-day decline in a bond fund, but if I'm right about liquidity troubles, a few funds will take a shot at it.

I can't name the suspects, but some fund that buys senior floating bank notes, unrated junk bonds, or similar illiquid garbage will prove that Heartland was not alone.

A resurgence among international funds.

Interest rates and the value of the dollar make this look like it will be the year of the foreign fund. It's about time.

Actively managed exchange-traded funds (ETFs).

ETFs were the "in thing" last year. They act like an index fund but trade like a stock, and nearly every imaginable index flavor was created in the past 12 months.

The one taste that wasn't catered to was an ETF that mimicked an ordinary, actively managed fund. Never mind that such a beast raises logistical, ethical and common-sense questions too numerous to go into here; if the fund industry thinks it can be sold - and it does - you'll see one soon.

Bad funds disappear.

One lousy year has many fund companies ready to kill their weak offspring, merging or folding them to shed mediocre track records. The kiss of death may even go to some popular recent stars, funds that put up big numbers in 1998 and 1999, only to give a lot of it back last year.

"Talking-to-human fees." Fund firms are desperate to wean investors from phone lines and paper documents. In an effort to create an ultra-low-cost fund, some upstart firm (and maybe even an established one), will start charging shareholders for talking to a live person for information that could have been downloaded at a Web site.

Somebody, somewhere, thinks this is "progress."

More investors disillusioned with funds.

Experience big capital gains payouts with losses and you have the basis for a lot of frustration. Throw in the ease of buying stocks online or direct from the issuer, the ability to create personalized portfolios at a reasonable cost or the chance to hire a money manager privately, and you'll see a lot of die-hard fund investors seriously consider the alternatives to funds.

A lesson that great tools don't make great investors.

As frustration with funds mounts, what's "next" in the financial services business often looks and sounds terrific.

But exciting new tools alone can't make someone a good investor. In the choppy market of 2001, many people embracing the new methods will find that you can hit yourself in the thumb with a fancy new hammer just as easily as with a trusty old one.

Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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