LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760
Thursday, August 16
Q. So, Don, you wanted to talk today about sector investing?A. Right. And this is a bit of a rebuttal to an item by Jonathan Clementson Tuesday in the WSJ that REALLY came down hard on sector funds.
Q. What did it say?
A. That they should be just about recalled like a bad tire. He calledthem "one of the financial world's most dangerous products."
Q. Well, they ARE above-average volatile among mutual funds, right?
A. Absolutely, they ARE more volatile since they are not very diversified.And I will agree with his point that when lots of new sector funds of aparticular type are coming out, that's a strong sign that that particulartype of investing is getting overheated. Volatility hurts in a down marketbut helps in an up market. They didn't write this story 15 months ago atthe top...
Q. But other than that business about watching when a lot of new onescome out, you like sector funds a lot, right?
A. Actually I do, and I admit to being a somewhat aggressive investor interms of picking my themes and also in that I do not practice thebuy-and-hold religion very strictly.
Q. Well, what can be said for sector funds?
A. That their record on average, over long periods of time, prettyconsistently beats the major averages.If you take these 4 major indexes, DJ30, SP500, NASDAQ Comp, and Russell2000 and the Lipper 1000 Index (which is 1000 largest USDE funds), here'show it falls out (annualized returns per year, except for 15mths, anddollar weighted avg. for the sector funds):
| | SECTOR FDS | THE 5 INDEXES | | 15 yrs thru 6/30/01 | +17.12% | +11.80 | | 10 yrs thru 6/30/01 | +19.63 | +13.71 | | 5 yrs thru 6/30/01 | +16.7 | +12.79 | | 3 yrs thru 6/30/01 | +12.82 | +5.28 | | 15 mths thru 6/30/01 | -28.41 | -14.47 | | from 11/30/87 low | +19.95 | +13.64 |
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Q. So the only time sector funds did WORSE was in the current bear market!
A. Right, and of course that has been heavily influenced by all thetechnology/telecom funds in the mix.Over 650 of the nearly 1,100 sector funds in the Lipper database are techand telecom. I realize it may not be fair to take them out right now, butthat would also affect all the longer performance periods too, and it turnsout that all other sector funds STILL beat those averages.
| | SECTOR FDS EX TECH | THE 5 INDEXES | | 15 yrs thru 6/30/01 | +16.69% | +11.80 | | 10 yrs thru 6/30/01 | +18.85 | +13.71 | | 5 yrs thru 6/30/01 | +16.53 | +12.79 | | 3 yrs thru 6/30/01 | +11.41 | +5.28 | | 15 mths thru 6/30/01 | +12.34 | -14.47 | | from 11/30/87 low | +19.30 | +13.64 |
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Q. And isn't it true that the major averages don't have expenses toovercome?
A. Right, exactly. So you should expect actively managed equity funds tostart out about 1.25% a year below the averages, and yet the sector fundsSTILL win.
Q. Isn't Mr. Clements a big fan of indexing?
A. True, so to be FAIR, I looked at Vanguard Index 500, the biggest onearound, and I added back all the tech funds...
| | SECTOR FDS | VANGUARD 500 | | 15 yrs thru 6/30/01 | +17.12% | +13.84 | | 10 yrs thru 6/30/01 | +19.63 | +15.00 | | 5 yrs thru 6/30/01 | +16.71 | +14.45 | | 3 yrs thru 6/30/01 | +12.82 | +3.91 | | 15 mths thru 6/30/01 | -28.41 | -17.07 | | from 11/30/87 low | +19.95 | +15.61 |
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and even with the lower expenses the Index 500 fund wins only in thepresent downturn, since it is not 60% technology!
Q. So what do you make of this, Don?
A. Well, I think that criticisms of sector funds are not well based. YES,if you buy ANYTHING in a red-hot phase it will not do well. And new fundsof all kinds come out when they are saleable, not when they're unloved.But that's a knock on the human nature of investors, buying at the wrongtime, not on SECTOR funds as such. It's like saying automobiles are badbecause they sometimes kill people. No, bad DRIVERS kill people. The keypoint is HOW investors USE sector funds. If they own them for the longterm, they are winners. If they lighten up on what gets super hot, they wineven more!
Q. Why IS that, Don? Are sector fund managers super bright?
A. I think the real reason is that major averages include stocks of allkinds regardless of industry. There ARE NO sector funds in a lot of matureand declining industries. None in tires and rubber. Just one in steel, onlya couple in transportation. None in coal, and so on.
