LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760
Thursday, Nov. 13
Q. Don, with the holidays here, a lot of people are reflecting back on adifferent and disturbing year.... I wonder how this may be affecting theirinvesting choices...A. A very valid point. I think as people reflect at this season they arethinking about what is important in life -- family, friends, their personalvalues -- and that raises the topic of investing in funds that use socialcriteria in making their choices.
Q. Are there a lot of those?
A. Not even counting money market funds or the few social criteria bondfunds, there are about 110 stock funds and classes of shares to choosefrom. Assets in these funds are a bit under $9 Billion, so only about 0.3%of total stock funds' assets of over $3 Trillion.
Q. So, are all of these funds quite similar -- basically environmentallyconcerned and so on?
A. That was the original flavor in the early years, but now it is a verymixed lot. You have funds that feature Catholic or true Islamic values,funds that are labor-friendly, funds that think about how children or womenare treated, those that oppose nuclear power, those that are against war,even those that watch how careful the high-technology firms are with theirchemical emissions -- just a whole wide range of choices and flavors.
Q. So, how does an investor choose the "right" one?
A. That answer is of course different for each individual. They need togo to the websites or the 800 # and get the details in the prospectus. Andwe notice that investors with social agendas in mind tend to be longer-termin outlook and weigh BOTH performance and their social aims. Only 2 monthsof outflows in 2001, while stock funds in general have had 5 outflowmonths.
Q. Well, HOW HAVE these funds done?
A. That's the age-old question... and the answer really changes dependingon when you are asking it. Looking at a reasonably long-term window:
| 5 Years Total Return (annualized) |
| Social Criteria Equity Funds | +9.5% |
| S&P 500 Index Funds | +10.2 |
| Lipper 1000 (largest funds) | +9.9 |
| Dow Jones Industrials | +10.9 |
Q. So they seem to be just slightly behind....
A. Right. They did not have the spectacular gains of the general marketin 1997 and 1998, but they had smaller losses than average in 2000. Thisyear, they are a couple of percent behind the S&P 500:
| Year to Date thru Dec 11 Total Return |
| Social Criteria Equity Funds | -14.6% |
| S&P 500 Index Funds | -12.6 |
| Lipper 1000 (largest funds) | -12.1 |
| Dow Jones Industrials | -7.3 |
Q. So, is it sort-of a random thing -- when and how much they vary fromthe averages?
A. It seems to depend on the KIND of social criteria that each fund uses.For example, if a fund is against the big oil companies on environmentalgrounds, that fund will lag the market when the energy stocks do great, orwill shine when energy is out of style. A fund that is opposed to cloningand rejects biotechnology stocks would run opposite to the averages inyears when the biotech stocks make big up or down moves. Ditto for atobacco-stocks focus. So basically, the social criteria in effect set thefund off center from wide averages, and that will drive performance. It'sjust like having a diversified fund that will always be overweight in aparticular sector that the manager loves. THAT drives variance inperformance.
Q. You mentioned that these socially conscious funds did well during 2000,not going down as much.....
A. Right. And I thought we'd give our listeners a chance to see whichfunds actually are the steadiest... so we have put up a list of sociallyoriented funds on our LipperLeaders.com website, which gives their ratingson preservation of capital and consistency of return over the past 36months. Too much detail to talk about on the air, but some goodinformation there.
Q. Don, looking slightly more broadly, with just a couple of weeks to go,how would you describe the year 2001 in terms of mutual fund behavior?
A. Well, it's been one of contrasts and a lot of things running oppositeto long term averages...
- Gold Oriented tops (+17%) but for 10yr is THE worst,(-3.6% ann)
- Science & Tech worst, despite recovery (-33%) but for 10yr is the best(+18% ann)
- Health/Biotech down (12%) but 10yr AVG is +16% annualizedSmall-cap GROWTH bad (-15%) but 10yr avg is +26% annLarge-cap Growth near bottom (-24%) but 10yr avg is +22% ann
- European (-23%) although 10yr avg is +21% ann(!)
High Yield bond funds are actually down 1.0% YTD, despite their big run-upin January and since Sept 21. People have flocked there to get yield buthave been ignoring risk!
Q. Don, some of those 10 year numbers are EYE-popping!.... what's thestory there?...
A. AH ! Glad you mentioned that. Investors always have to be carefulwhen looking at long-period returns: both the current state of the marketAND THE STARTING POINT are equally important. Ten years ago we were rightnear the bottom of the bear market that came during the prep for the GulfWar. So that base is low. Next October we will hit 15 years from thecrash bottom of 1987. And so on. Always watch for the details!
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
To read more Don Cassidy Interviews, please visit the column archive.
