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Fund toppers and floppers
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December 1, 2000: 7:34 a.m. ET
Funds surprise with their chart-topping, and tanking, performances
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Unlike day traders keeping a constant eye on stock prices, mutual fund investors are in for the long haul. Whether it's for three years, 10 years or decades, investors putting their money in funds hope to ride the waves that can send them to triple-digit-return highs but unfortunately can take them to devastating lows too.
Some funds that had a tough go of it in 1999 managed to round the corner this year and come away with striking returns. However, other funds which were expected to do well or at least hold their own after astronomical returns last year took a turn for the worse this year.
Morningstar analyst Russ Kinnel offers up some of his chart toppers and floppers for investors to keep an eye on (and an eye out for).
Chart toppers
Value is making something of a comeback in the market and the Kemper-Dreman High Return Equity Fund is testament to that theory, according to Kinnel. The $1.3 billion fund has had a turnaround year, posting a 27.43 percent return year to date as of Nov. 24, according to Morningstar. That's way up from last year, when the fund was down more than 13 percent.
Kinnel notes that fund manager David Dreman is "an Internet and tech skeptic," which is why Dreman sticks with stalwart value names like Philip Morris. Also, the fund gets a boost because Dreman has favored stocks in financials, energy and tobacco.
"In general, the market is the opposite of what you saw last year, which was tech and large cap," Kinnel said. "Those are the worst areas now."
Again on the value theme, the Clipper Fund, a large-cap value fund, has surprised some by its 2000 performance with a return of 25 percent year to date. In 1999, the fund was down 2 percent but its 10-year track record of 20.3 percent keeps investors and analysts coming back.
"A lot of individual investors assumed at the end of last year new economy meant good and old economy was history," Kinnel said.
But the tides have turned. Typical value funds are up about 1 percent this year, according to Morningstar, whereas large-cap growth funds are down 11 percent for the same period. In 1999, the scenario was flip-flopped. Value funds were struggling, up only 6.7 percent while large-cap growth funds returned almost 40 percent.
With more than half of the fund's assets dedicated to tech, the White Oak Growth Stock Fund seemed vulnerable to this spring's tech correction. But the $5 billion fund held its own with tech picks like Ciena and Corning, and the fund's financial and health care stocks provided a boost to returns. The fund is up more than 13 percent year to date.
Kinnel also notes that lead manager Jim Oelschlager is very experienced and has proven to be an excellent stock-picker.
Those funds that flopped
Some funds that were chart toppers in 1999 took a nosedive this year, much to some analysts' surprise.
Investors buying technology funds last year probably had their hand on their heart this year as the sector took a huge hit.
Caught in the wake were funds that invest in Internet technologies, such as the Jacob Internet Fund, which was introduced only at the beginning of 2000.
The Jacob Internet Fund, run by Ryan Jacob, is down 72 percent year to date.
"Investors who climbed on the bandwagon hadn't stopped to think that a fund that went up so much last year would lose so much this year," Kinnel said.
Sheldon Jacobs, editor of the No-load Fund Investor newsletter in Ardsley, N.Y., says after 1999, the Internet sector had expected to do extremely well, but the whole group collapsed.
"I'm sure there were many people out there who thought Internet stocks would go up for years and years."
After a show-stopping year with returns around 60 percent, the Janus Twenty Fund took analysts and investors by surprise this year, now that it's down almost 25 percent year to date.
Janus, referred to by the Financial Research Corp as the best-selling fund group for the year, is best known for its heavy technology investments and bonanza returns during the Nasdaq-led bull market of recent years.
But with the rough ride the Nasdaq took in late March and early April, some of Janus' funds took a hit. Janus Twenty, a large-cap growth fund which holds Cisco, America Online and Sun Microsystems, bore the brunt of the sell-off.
"Janus 20 and large-cap growth stocks could almost do nothing wrong in 1998 and 1999," Kinnel said. "You need to recognize that big returns come with big risk, and at some point there will be a nasty down period.
But analysts point out that manager Scott Schoelzel has one of the longest track records of any Janus manager.
Municipal bond funds, which invest in transportation, school and city projects, don't normally get a lot of press since their returns are piddling compared to high-flying tech funds.
But earlier this month, shareholders decided to sue Heartland, after two of its tax-free bond funds declined rapidly. The Heartland High-Yield Municipal Bond Fund and the Heartland Short Duration High-Yield Municipal Fund plunged in October after the company said it adopted a new pricing procedure. Kinnel says the fund manager was buying nonrated bonds, which is legal, but can be risky.
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Investors who climbed on the (Internet) bandwagon hadn't stopped to think that a fund that went up so much last year would lose so much this year.
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Russ Kinnel
Morningstar analyst |
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"In the past, all bond fund blowups were interest-rate related," Kinnel said.
Today the Heartland High-Yield Municipal Bond Fund is down more than 69 percent while the Heartland Short Duration High-Yield Municipal Fund is down 42 percent.
The lesson here, according to Kinnel, is "be very careful of buying a fund with a lot of nonrated bonds."
So what's an investor to do when their favorite fund tanks after head-turning returns?
Diversify your portfolio and make sure you don't have too much exposure to one sector, such as technology. Also, choose funds that have long track records of at least three to five years, longer if possible.
Lastly, "If it's a good fund it's still worthwhile," Kinnel said. "Hopefully, it's [a] long-term [account] and you're not saving to buy a car with it."
-- Staff Writer Jennifer Karchmer covers mutual funds and retirement news for CNNfn.com. 
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CHART TOPPERS, BY MORNINGSTAR'S RUSS KINNEL
