Election investment is bad bet

Your Funds

Your Money

August 08, 2004|By CHARLES JAFFE

THE HARDEST media job at the Democratic National Convention last month may have been the search for a connection to the mutual fund business.

Aside from sponsorships, the fund world was excluded from the discussion. There was no talk of legislation that would exempt fund capital-gains distributions from taxes (a proposal that has some merit but likely won't get serious consideration until the market again provides big payouts to investors). Heightened regulation and new rules weren't on the agenda either.

That's as it should have been.

While mutual funds are the investment for the common man in America, they are remarkably apolitical.

So for anyone considering an investment play in funds based on the election, here's some advice: Stop it.

Market prognosticators keep talking about how the outcome of November's election is likely to help or hurt the market, but there is a huge disconnect between their predictions and what you can realize as a gain in your fund portfolio.

For starters, recognize that people in the prediction business make forecasts. It's their job, but it hardly makes what they say worthy of action.

As an investor, a big part of your decision-making boils down to deciding which predictions to act on and which to ignore.

For fund investors seeing election forecasts, ignoring the whole lot makes the most sense.

Pundits make the case that a Republican victory is better for business and the economy, but if you examine market statistics over time you will be hard-pressed to prove it. Both presidential campaigns will mine the data to make their points, but the president does not make laws in a vacuum, determine the direction of interest rates (let alone set them), or have a direct hand in many decisions that steer the economy.

While each party will find evidence that it is best for the stock market, history shows that's more coincidence than direct cause-and-effect.

Trying to capitalize on the election outcome is doubly tricky in funds, simply because a managed pool of investments doesn't react with the same sensitivity as an individual security.

So while some market seers suggest that a Kerry victory would be good for alternative-energy stocks, for example, it's nearly impossible to translate that into additional returns in your fund portfolio if you believe the Massachusetts senator will pull it out in November.

If you go hunting for funds with a lot of stocks in the affected industry, you're looking at old disclosures and hoping the fund manager hasn't changed directions lately. That's not the way to pick a short-term play.

Issues arise even in sector funds. While a Kerry win could be good for alternative energy companies, it might be a downer for domestic energy stocks. An energy sector fund is likely to hold both types of stocks, making the election a neutral event.

That's one more reason why most managers worry more about fundamentals than about macroeconomic and sociopolitical issues when picking stocks.

Even if you find the right fund for an election play, many funds responded to recent trading scandals by imposing short-term redemption fees.

If an election-oriented investment is a short-term play, you're paying to make a quick round-trip. That means that any gains from election-year investing would have to outweigh applicable exit fees by enough to make the exercise worthwhile.

Don't bet on it.

"The election is not an investment play in funds," says Stephen M. Savage, editor of the No-Load Fund Analyst newsletter. "Most fund managers aren't investing based on what the election will do for their stocks, so picking a fund hoping for an election boost is folly."

Factor in redemption fees and taxes and "it's no better than the red-black bet on a roulette wheel," says Savage, "with the odds in the casino being at least as good as what you will get from playing a fund because of the election."

Hoping for an election bounce may be futile for another reason.

The first year of a presidential cycle historically is a poor one for stocks, lowering your chance for short-term success.

"Without a clear-cut winner or loser right now, you don't have a play to make," says Steven L. McKee of the No-Load Fund Selections and Timing Newsletter. "And you throw in a flat-market environment and it's not like anyone can say, `If Bush or Kerry wins, here are the funds that immediately take off.' Fund investors should watch the election, but they shouldn't invest based on it."

Charles Jaffe is a senior columnist for CBS MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, Mass. 02025-0070.

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