Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN
Tuesday March 14, 2005
A. Yes, indeed. And the picture we see in funds' performances has beenbreath-taking!Q. Well, a lot of investors certainly lost their breath on the way down...
A. Right, and when you look NOW at the total returns on various kinds offunds from the top to now, the range is huge!
Q. Maybe we should start with the average.
A. Sure. The Lipper 1000, which tracks the unweighted performance of the1,000 largest EQUITY funds, is down 7.3% from the top to now.
Q. That's not so bad...
A. Except that people have gotten five years older, and that (I bet) mostpeople panicked at some lower level and did not do as well as that broad"average."
Q. Interesting point. And how about the S&P 500 Index, which so manypeople follow?
A. That is down 15.1% in the same time. Basically because large-cap didworse than small- and mid- and multi-cap, and because value did better thancore, which is what the S&P 500 represents. To illustrate that, theVanguard Total Index Stock Fund is UP 1.9%.
Q. OK, so what have been the broad-brush trends in the past five years?
A. Well, any kind of bond fund you could think of has been up. Money fundshave probably NOT kept up with inflation, especially after taxes. And ifyou look within equity funds, almost as many types are up as are down --and the range of results is very wide. Three types have more than DOUBLED,in fact!
Q. Gold has to be on that short list.
A. Number one!...
- Gold Funds + 179.4%
- Real Estate Fds + 146.5
- Small-Cap Value + 107.8
- Natural Resources Fds + 93.9
- Emerging Markets Debt Funds +87.9% lead all the bond-fundtypes
- Int'l Income Funds
- +59.5 with of course help from aweak dollar
- Mid-cap Value Fds + 62.6%
Q. How have some of the sector funds done?
A. Well, aside from the huge winners mentioned a minute ago...
- Financial Svcs Funds +51.4%
- Health/Biotech +15.7 hurt lately by the major drugstocks
- Utility
- - 4.3 despite doing well in 2004 andto-date in 2005
- Science & Tech Funds -70.3%
Q. I guess as long as we're naming some of the weakest areas, what else hasreally lagged?
A. Things that were aggressive domestically, and Japan among theworld-equity types.
- Large-Cap Growth -48.2%
- Multi-Cap Growth -44.1
- Mid-Cap Growth -42.6
- Small-Cap Growth -29.9
- Japan Funds -33.2
Q. What lessons do you take from all of this, Don?
A. I think the two big ones are not new news, but they are difficult forpeople to actually implement, so reminders are needed...
- You NEED to diversify, especially if you tend to be passive orhave trouble accepting losses.
- You SHOULD re-balance. That way you take some money off the tablein areas that have been super hot, which will serve you well in a decline,since the favorites rotate.
Q. Why do people have so much trouble with selling?
A. That is a long, long story. There is a lot of emotional baggage.People don't like to admit mistakes, so they hold losers in hope they willcome back. They don't like to sell big winners, because they don't want topay the taxes. They fantasize that they will get out at the top, so nogain is good enough. I think people have been OVER-educated to 'buy andhold.' In this case, it did them harm, since the former leaders (S&P 500and large-cap and technology) have been the laggards.
Q. So, is the advice to re-balance saying that you think the recent leadersshould be cut back?
A. I'd be more nervous if I thought we had already reached the top of thecurrent bull market. But psychologically we are far from boiling over. Butat some point, it would be prudent to re-balance, and if that means cuttingdown on energy, real estate, and gold funds, and small-cap, so be it.
Q. What is an appropriate percentage in such areas?
A. Tough question. And it depends on each person's ability to standvolatility, and on their time horizon. I would generally say that anythingmuch above about 5% in any sector is probably on the aggressive side.Especially when you consider that diversified funds will also hold somestocks in the various sectors as well.
Q. You spoke about large vs small, but what about value vs growth?
A. We just see pervasive CAUTION in people's outlook, and the love fordividends-in-hand today. That implies that even though value has beenwinning for five years or so, it may well still have some time on top ofthe rankings. People are just not ready to take wild flyers on stories.If you ARE diversified, you will have some money in a growth fund, and thatmeans you will catch the turn when it eventually comes.
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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).
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