Mutual funds, the little guy's niche, are big with institutions, too
Michael Hirsch, chief investment officer of Republic National Bank, reels off the names of a few unsung mutual funds he likes: Washington Mutual, Decatur Income, Pilgrim Magnacap. ``When there are over 1,000 mutual funds out there,'' Mr. Hirsch says, ``there are some very good funds that slip by people's attention.''
Why is this banker so well versed in mutual fund performance? After all, aren't banks, with their various trusts and investment funds, rivals of the mutal fund industry?
Yes. But banks, institutional money managers, and mutual funds do a great deal more business with one another today than one might suspect. Republic, in particular, is a fan of mutual funds.
It is one of a growing number of institutional investors employing the professional management capabilities and diversification aspect of mutual funds to increase their own investment performances. In fact, Republic has more than $250 million invested through mutual funds.
And while it is a big player, Republic is hardly alone. Recent figures from the Investment Company Institute -- the industry association that represents some 1,400 mutual funds -- shows that levels of institutional money have increased dramatically in the past six years. (Institutional money is money directed by fiduciaries like banks; individuals serving as trustees, guardians, and administrators; retirement plans; and union, corporate, church, hospital, and school pension plans.)
At present 38 percent of the assets managed by mutual funds -- some $140 billion -- is institutional money, a substantial increase from the $40 billion and 28 percent of assets six years ago.
Naturally, much of that money is parked in money market funds. But nearly one-third of the institutional assets invested in mutual funds today -- more than $40 billion -- is invested in stock, bond, and income funds.
And professional money managers like Hirsch, who are paid to select mutual funds for their clients, devote time and effort to studying the management disciplines and records of various funds. Their evaluations may be helpful to the individual who barely has the time to scan the mutual fund advertisements in the daily papers, let alone focus on individual management styles.
``We look for someone who has been doing something well over a period of time,'' says Mark Dollard, senior portfolio manager at Amivest. His firm uses mutual funds to manage more than $250 million for 15 tax-exempt organizations, including the International Association of Machinists National Pension Fund.
Mr. Dollard concedes that there ``are a lot of ways to make money in the market, and different styles work.'' But Amivest looks at styles that have achieved success consistently over the years.
At present, Amivest is concentrating on preserving capital, despite the recent stock market rally. Decatur Fund, run by Delaware Management Company, is good for this climate, Dollard says.
``This is a classic contrarian approach. The portfolio manager will say, `Think of a stock that is dull and people hate and I've probably bought it or am about to buy it.' ''
Decatur Fund's yields, he says, also usually do better than the market. ``When the stock price rises so that it yields the market yield, the management sells it,'' he notes. ``It is a management style that has worked well for 20 years.''
Another Amivest favorite is Weingarten Equity Fund. ``It is basically fully invested at most times and buys good-quality growth funds,'' Dollard says; ``and they are willing to pay a little over the market price/earnings ratio for them. If the market is selling at 14 time earnings, they may pay 16 times. But they have a very good record, and sometimes when the market goes down, they do, too. But when the market is sailing, they sail with it.''
Mr. Hirsch at Republic Bank upholds Amivest's quest for consistency. Republic primarily invests for small retirement accounts, endowments, and corporate retirement plans. The program has been in effect since 1976, but Republic established Fund Trust a year ago to allow individual investors to take advantage of Republic's selection of mutual funds.
Republic has a two-step process for choosing funds. First, it screens funds to discover those that have been able to deliver consistent performance. ``It doesn't have to be superior,'' says Hirsch. ``It just has to be consistently in the top 50 percentile.''
Such a screening for a three-year period, Hirsch says, eliminates 90 percent of the universe of mutual funds. ``Consistency,'' he says, ``is just not that easy to deliver.'' While Fidelity Magellan Fund has been the No. 1-performing fund over the past 15-year period, Hirsch notes, it has appeared among the top 10 fund performers only twice on a year-by-year basis in that period.
Step 2 in Republic's search is not easy for the individual investor to emulate. Hirsch meets with the managers. ``We don't buy simply on the basis of numbers. We want to meet the individuals, see who calls the shots, and how long they have been with the company.''
So far, the effort has paid off. In Fund Trust, for instance, Republic's aggressive portfolio was up 22 percent in November; its growth fund rose 20.8 percent, and its growth and income fund was up 20.6 percent.
Not all Hirsch's commentary on mutual funds is favorable. He stays away from sector funds like technology, leisure, or international.
``I think sector funds are better for the industry than the investor,'' Hirsch says. ``It just ensures that a large family of funds has at least one in the top 10 funds in every quarter, which gives them a vehicle to advertise. For the investor, it is totally couterproductive. If I am paying 0.05 percent or 0.07 percent for a portfolio manager to make decisions, I want him to choose the right sectors and diversify.''
Not everyone is in agreement with Amivest and Republic Bank, however. At No-Load Fund*X, a San Francisco-based specialist in managing small corporate retirement accounts through mutual funds, Burton Berry believes in an ``upgrading'' technique, whereby money is moved progressively into the top-performing funds in the no-load fund universe.
``We go into a fund that has been doing well recently,'' Mr. Berry says. ``We pay little attention to the five-year record. We don't think it is predictive.''
Berry explains that his firm made a study of the top 25 no-load funds for the five-year periods ending 1970, '75, '80, and '84. The results: Very few did well the following year. When one studies the funds that are the top performers -- particularly diversified funds rather than specialty funds -- they tend to stay in the top-performing category for quite a while.
``Those fund managers have picked the groups that are doing well or that the market favors,'' Berry says. ``That fund manager is a hero. He may not even have picked the right stocks at the right time. He may have been holding them for 10 years. But he is riding the current market wave.'' And, Berry feels, that wave does not subside for a while.
At present Berry is invested in Legg Mason, Nicholas Fund, Mutual Shares, Sequoia, Vanguard Qualified Dividend, and Vanguard Windsor.
Another investor in Vanguard Windsor Fund is FMC Corporation's pension fund. FMC pension fund manager William Schuman favors mutual funds because their historical records are more verifiable than those of institutional money managers. FMC goes for mutual fund managers who take the value approach: buying low price/earnings ratio stocks. For FMC, these include Templeton, Vanguard Windsor, and the Sequoia Fund.
Perhaps Hirsch at Republic provides the best reason institutions have for using mutual funds: ``Why should an institution rely on the ability of a young untested money manager or an over-the-hill money manager when it can take advantage of a John Templeton, a Max Heine, or a Charles Royce?''