Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday March 1, 2005

A. Yes, we're in another building in downtown Denver, about 7 blocks acrosstown.

Q. Well, it's nice that you could get unpacked and prepare for joining ustoday.

A. Happy to do that. I was thinking back... although I joined Lipper about14-1/2 years back, our old offices were in the same place for 20 years!

Q. Quite a long time. And some HUGE changes have been seen on Wall Streetand in mutual funds in that time...

A. Right! We've seen parts of five presidents' terms, a couple ofrecessions, the crash of 1987, the wild bubble of the late 1990s, and ofcourse Sept 11th.

Q. Can you catch us up on what has happened in the funds world in the past20 years?

A. Probably NOT in the next four minutes. But very basically: the numberof equity funds back then was about 520, of which 402 remain. Now thereare 4,077 equity funds with 11,312 CLASSES to choose from. The number ofclosed-end funds has grown from about 60 to 625. And we've seen theinvention of ETFs and their rapid asset growth. Assets in equity mutualfunds have grown from under $120 billion to over $5.4 trillion.

Q. Twenty years is probably a long-enough period where if you look atperformance you start to see some meaningful patterns, right?

A. I would think that academics would start getting comfortable with thetime series, although in a few cases the sample sizes of types of funds arepretty small. And of course we DO have survivorship bias...

Q. So how has the average surviving equity fund performed over the past 20years -- the ones that have been there the whole time?

A.

• best +19.1% / year compounded

• worst -11.4%

• Avg +10.8

• Median +11.1

• $-wtd +12.74

• Vang Idx 500 +12.47%

Q. It's interesting that you point out the Vanguard Index 500 fund...

A. Well, they are one of the three largest in terms of assets, andproponents of indexing are correct when they say that over the long run theexpenses of actively managed funds will chew into your returns and create adisadvantage...

Q. So, what percentage of these 20-year surviving equity funds have BEATENthe Vanguard Index 500 over that time?

A. A little over 21% have done so. More some years, like the 49% that didso in 2004, and fewer in other years. It depends on the window youmeasure. It has not been a great time for large-cap stocks over the pastfew years -- really since early 1999 !

Q. Is there anything that stands out as you looked over the 20-yearnumbers?

A. Yes, a few points...

• The returns HAVE converged very much to the ranges cited by Ibbotsonand Dreman -- about 11% for equity funds

• World Equity is a little behind the predictions: +10.7% per year

• US Diversified Equity, containing about 60% of those long-life funds,is up 11.1%, which is below the S&P

• Sector funds are interesting: +12.1% if you exclude gold, and +10.4%if you include it

Q. Do the numbers make a strong case for any particular style of investing?

A. One answer is to say that the kinds of funds that let you sleep best atnight have certainly held their own: I would say that adjusted for theirrisk, these average returns are very nice...

• Equity Income Funds +11.0% / year

• Income Funds +10.5

• Balanced +10.0

Q. And what about the old "style" debate -- you know, value vs growth andlarge vs small and all of that?

A. Clearly value has won...

• Value +11.9% / year

• Core +11.4

• Growth +10.5 although the past few years havedefinitely given an advantage to Value

The SIZE dimension is a little closer than I would have guessed, butit may be influenced by the survivor bias favoring large funds (there werevery few small-cap funds 20 years ago)

• Large +10.8% / year

• Multi-cap+11.8%

• Mid +11.1

• Small/Micro 10.7

And the overall USDE matrix, 20 years thru 1/31/05...

	Value	Core	Growth
Large	11.7	11.0	10.0
Multi	11.7	11.7	12.1
Mid	13.3	10.3	10.8
Small	11.7	10.8	9.9

Q. That Multi-cap return of 11.8% is interesting.

A. Yes indeed, and I should point out that this is a classification thatsome of our competitors do not recognize. If a fund spreads its assets outwidely, we do not force it into a size category! And it is interestingthat exactly these unconstrained funds have done the best over the longterm.

Q. Why is that, do you suppose?

A. Markets go in and out of various phases. A portfolio manager who isglued to a certain box in the 4x3 matrix (style vs capitalization), whentheir approach goes out of favor -- their performance will of coursesuffer. Someone who has freedom to move around, and who has a good pulseon the market, can outperform in multi-cap (and in CORE, for the samereason).

Q. Outside the diversified funds, what has done especially well?

A. The specialized kinds of sector and specialty funds you might suspect,if you look at our economy -- where the growth is:

• Healthcare/Biotech +16.3% / year

• Leisure +15.9 very limited sample

• Financial Services +13.9

• Technology +11.7

• Utilities +10.8

• Natural Resources +10.5

• Gold + 4.3

Q. And, just for the record, what have been the half dozen or sobest-performing funds over these 20 years?

A. I'm going to limit the list to funds PRESENTLY OPEN TO new investors:

• Vanguard Health Care +19.3%/year HC

• Fidelity Select HC +16.7 HC

• Seligman Communication +16.0 TK

• Columbia Acorn +15.9 Mid-Cap Core

• Mairs & Power Growth +15.7 Multi-cap Core

• Fidelity Contrafund +15.6 Multi-cap Growth

and of course one must say that "past performance is no guarantee offuture results" although 20 years is a good run!

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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).