LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760
Thursday, January 3
Q. Happy New Year.A. Indeed... and the same to you and all of our B4B listener friends!
Q. Well, the year 2001 is finally over....
A. Yes and I read several articles in the newspapers and websites over theweekend that called it "a year to forget."
Q. Well, it WAS pretty unpleasant for investors.... and otherwise.
A. True and perhaps it is the contrarian in me coming out, but I think badexperiences are worth analyzing and learning from. Coaches say athleteslearn most from defeats, not big wins....
Q. OK, what can we take from 2001?
A. First, that diversifying our mutual funds (and overall!) portfolios hasonce again proven its value: too much of one thing can feel good sometimes,but can feel awfully bad at other times. Volatility is WHY we need to staydiversified.
Q. You're referring, I imagine, to technology and telecomm funds?
A. In this case, yes, but in future market cycles it will be somethingelse. In the mid 70s and again the early 80s, it was energy stocks andfunds. And not only will our wealth go down far if we own too much of aformerly hot thing, but we expose ourselves to the risk of giving up andselling out at the bottom BECAUSE we are so badly hurt!
Q. What else?
A. Well, that moving towards emotional comfort does not produce financialcomfort.
Q. Explain that a bit?..
A. When we make investment decisions that seem extremely obvious or veryurgent, what we are doing is joining the crowd, which becomes large andunruly only LATE in a market move up or down, not early. So we buy late(as in first quarter or 2000) or sell late (as in the panic bottoms ofMarch and September 2001). When you do what seems obvious, you are joiningmillions of other people who all fell and act the same way, and that sizeof a crowd is at its max, so prices just have to reverse.
Q. Is there a practical way people can calibrate on what the crowd isdoing, so they avoid that mistake?
A. One is to step back and ask how emotionally urgent your planned actionfeels. The more urgent, the more likely it is emotion-driven and willprove wrong. If you want some numbers to look at, follow the trends inmutual funds flows: when they get far different from the latest 12-monthaverage, you are looking at a market extreme. The major outflows in Marchand September were just screaming "market bottom!" Watch magazine coversfor bull or bear pictures, as those are also late-stage signs every time.
Q. OK, then, what did best and worst in 2001, and how can we apply thatknowledge to 2002?
A. Quality bonds did best in their world, and high-yield did worst. Ihesitate to say good things about high-yield funds, since they have verylow or negative returns most years, but if you believe the recession willend soon, maybe by late 2002 defaults will decrease and such bonds will dobetter. Interest rates are so low on the long quality bond, so I suspectinflation-indexed bonds (and funds) are safer at this point.
Q. And in the equity funds world??
A. Gold funds were #1, up over 19% Value definitely beat growth, with small-cap and mid-cap value up about 16 and 10% respectively Real Estate was good, up almost 9%, the only winning sector besidesgold Pacific Ex Japan funds fell only 2% Emerging Markets funds were down less than 3% Balanced funds, asset-class diversification in a single wrapper, weredown just 4.4% Tech and telecomm funds were worst, down 37 and 39%, respectively Japan remained in the doldrums, and lost another 30% Europe was down over 22% Both Large-cap and Growth style, heavily influenced by technology, were big losers, dropping 22-25% International funds (-21.8%) were worse than domestic (-13.3%) onaverage Utility funds lost 21%, pretty shocking for widows and orphans!
Q. So, what does that mean for 2002?
A. Lipper doesn't make recommendations, so anything I say here is my ownpersonal thinking. I really try NOT to project recent trends continuing,but in some cases they make sense. Corporate earnings are still fallingand P/E ratios are quite high, so I have a hard time wanting growth-stylefunds over value-style. Growth usually wins in bull-market periods, but Ithink 2002 may be an exception. I would NOT buy gold funds, which have arecord of short, sharp spikes followed by long dreary declines. I DO thinkReal Estate funds have more upside left, as interest rates will stay lowand people will look for safety, which high dividend yields provide. I'dbe cautious about Utility funds, at least ones that did worst in 2001,since telephone stocks are the culprit. Funds that avoided them in 2001were smart. There will be more mergers in electric and gas companies.International funds generally did poorly, worse than the US ones, becauseof their Europe and Japan weights. I have a hunch Europe will be up in2002 and the US$ will be weaker against the Euro. I am betting on LatinAmerica funds rising too. So emerging markets funds make sense despitemaking only 2.4% a year over the past 10 years(!). I smell a rise inenergy prices, so I would buy natural resources funds that eschew gold,BEFORE the prices rise. Financial Services and Healthcare funds are goodbets long term, and 2002 should be positive there.
Q. What about technology funds, Don?
A. Tough call. Business is still bad. Stocks THAT HAVE earnings have veryhigh P/E ratios. These funds have already run up a LOT since the Septemberlow, about 40% or so. I do not believe they will go down for a 3rd year in2002, but I have a hard time making the case they will be among the biggerwinners either. If I owned one, I'd take my tax loss and buy another goodone back, I guess.
Q. DOES Lipper provide anything individual investors can use to help withtheir funds decisions?
A. Yes, we do. Go to www.LIPPERLEADERS.com, our new website just sinceOctober. There, we provide ratings on funds on more than one simple scale.Right now we have rankings for Preservation and for Consistency of Returns.In the months ahead we will add more vectors or scales, so people canunderstand funds in multiple dimensions that matter to them!
#
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.
