Lipper's Don Cassidy on KTLK AM-760
Thursday, June 6, 2002
Q. Don, you folks over at Lipper have been running the numbers on mutualperformance as always -- what do the latest results show?A. A year of opportunities - that most people have missed!
Q. Really?! It just feels like it has been another down year with lots ofbad news and stocks falling out of bed all over....
A. Well, I think it has depended on where you are looking, and where yourdollars are. We see some large differences from the bottom to the top ofthe various kinds of funds...
Q. OK, some examples please....
A. Year to date, up through a few days back, the end of May, here are theworst- and best-performing equity funds types:
- Telecommunication Funds -28.7%
- Science & Technology Funds -23.7
- Health/Biotechnology Funds -17.8
- Multi-Cap Growth Funds -12.3
- Large-Cap Growth Funds -11.4
- Gold Oriented Funds +72.7%
- Emerging Markets Funds +12.3
- Japanese Funds +12.0 (!!!)
- Pacific Ex Japan Funds +11.2
- Real Estate Funds +10.9
- Pacific Region Funds +10.3
- Small-Cap Value Funds + 8.1
- China Region Funds + 7.9
Q. OK, I see your point: when you get down to about #5 on both of thelists, the gains and losses are about the same -- 10 or 11%.
A. Right BUT, the amounts of money are very different...
The five funds objectives (above) with the largest losses have about$595 billion, or about 1/5 of all mutual fund equity assets in them. Theeight gainers have a total of only $147 billion in them - less than afourth as much!
Q. So investors have sort-of missed the boat in 2002?
A. It seems that way. The unwinding of the bubble from the late 90s andearly 2000 is still hurting the kinds of stocks and funds where people havethe bulk of their money: large-caps, growth, technology and so on. If youadd in S&P 500 Index funds, with assets of $234 billion and an average lossof almost 7% year to date, you have $829 billion or over a quarter of totalequity fund assets taking the biggest hits YTD. Except gold, which was hotfor much of 2001, many of the winners this year were in the doldrums, andno one is much interested. Try and convince a friend, or YOURSELF!, thatJapan is the place to invest. Not easy.
Q. Let's talk about Japan... what's happening?
A. Well, I'm not sure they are in a new prosperity era by any means, butthere are some positive signs. The government is starting to push hard onexports, to improve the economy since consumers refuse to consume. Some ofthe banks are starting to get a little healthier after a long siege. Andit has been out of favor for so long that a 12% rally is pretty small interms of actual dollar or yen gains.
Q. Why have investors been so far off the mark, Don?
A. A lot of it is inertia. People have learned to buy S&P 500 Index fundsin their 401K's, and for a long time the Large-cap Growth funds treatedthem well, so that is where the money is sitting. People have a hard timeselling. So they sit on what USED to be moving, hoping..... Ego playsinto it too: refusing to admit a mistake can get costly. We live in aworld where things change fast sometimes, so we need to be nimble asinvestors.
Q. Do you think the winners so far in 2002 will persist?
A. Lipper does not forecast the markets, so what I say here is personalopinion. I happen to be a contrarian and a value investor, so those aremy biases. I believe the economy is in a fragile recovery and profits willnot be strong for a while. Confidence is hurt by the accounting scandalsand the renewed terror fears. In that environment, people do not go outand speculate on high- or infinite-P/E stocks. So large-cap andtechnology, which are still valued generously, seem likely to stay in theshadows for a while. People love safety and value and dividends right now.That accounts for value funds and REIT funds doing nicely. There is alsorising awareness of the decline of the US dollar, so funds for investingoverseas are attractive, and many of those markets have lower P/Es thanours does.
Q. What should investors do at this point?
A. Again: personal advice rather than Lipper speaking.... you MUST bediversified so you will not panic and sell everything at the lows. Ownsome bond funds, which have given moderate positive returns again thisyear. Municipal bond funds give very nice net returns after taxes. Boringbut easy to sleep with. Maybe balanced funds. Don't stay entirely in whatWAS hot in 1999-2000, because that will take a while longer before startingto recover. Expect modest returns this decade, not the 25% people THOUGHTwas normal in 1999. The income from utility and REIT funds will keep thekinds of stocks they own popular until the climate of fear and indecisionwears off. Long and tall booms and bubbles take a long while to wear off,and people in our culture tend to be impatient. Successful investing saysyou must do what is NOT always comfortable, what sometimes feelsunreasonably daring or lonely. Last December I used that reasoning tosuggest buying Latin and Europe funds, raising overseas exposure. Thoseareas had been dull, long laggards. I said I'd stay in REIT funds and invalue. That has played out fairly well.
Q. What about gold funds, Don?
A. I fully admit missing the train there! I do not see inflation in theworld economy unless we have an oil embargo. Gold has a history of briefruns up, 3 to 15 months, and then goes to sleep and trails lower and drivesyou crazy for several years. I think it's getting late in the presentcycle to be a heavy gold bull. And the 72% gains? Only 1/10 of 1% of fundinvestors' equity funds dollars are in gold funds. Lots of buzz aboutsmallish actual dollar profits.
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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.
