Success Means Trouble For Many Big Funds
Success may be spoiling some of America's biggest mutual funds.
Investors have poured $269 billion into stock mutual funds in the past 16 months, much of it into large, successful funds.
Trouble is, the fund managers are struggling to find a place for all that money.
Here's the problem: When a fund is small, it's easier to run. The manager can load up on favorite stocks without worrying about driving up the share prices.
But managers of giant funds with billions of dollars in assets can invest only a small percentage of those assets in any one stock, no matter how attractive.
The result: Watered-down portfolios, with big, clunky stocks used as parking spaces for cash.
So the best stock pickers sometimes have the hardest time making good on their ideas. For investors that difficulty often translates into low returns.
One option, experts say, is to find small, nimble funds with sterling managers. Sounds easy enough, but some funds are small precisely because they're losers.
And don't confuse small funds with funds that invest in small companies. Both can be fine, but be sure to do some research. Small-company stocks have had a tough time this year.
A recent issue of Morningstar Investor, a newsletter put out by the Chicago fund-rating company, came up with a couple of strategies.
1. Consider new funds whose portfolio managers have been successful elsewhere.
One example is Berger New Generation (800-333-1001; $2,000 minimum investment; 0.25 percent load), run by William Keithler.
He previously ran Invesco Small Company Growth Fund, and delivered an annualized return from 1992 to 1993 of 24.6 percent. That compares favorably with 14.9 percent, the average return for other small-company growth funds.
But Mr. Keithler's record this year looks less impressive. The Berger fund lost 19 percent through April 21, worse than most small-company funds, according to Morningstar.
2. Find funds that don't do much marketing, or have high minimums that scare off investors. Morningstar points out five such no-load funds:
* Torray (800-443-3036; $10,000 minimum; $2,500 for individual retirement accounts), delivered a 26.4 percent three-year annualized return, top of the heap among the 593 funds in its investment objective. Year-to-date: down 1.3 percent.
* Fasciano (800-848-6050; $1,000 minimum), has three-year returns averaging 17.7 percent, 60 percent greater than competitors, with 32 percent less risk of share-price swings. Year-to-date return: down 8.3 percent.
* Mairs & Power Growth (800-304-7404; $2,500 minimum; $1,000 for IRAs), with 26.1 percent three-year returns. Year-to-date: down 2.8 percent.
* Papp America-Abroad (800-421-4004; $5,000 minimum; $1,000 for IRAs), with 26.8 percent three-year returns. It invests mostly in large American companies that depend on overseas operations. Year-to-date: up 5.6 percent.
* Sound Shore (800-551-1980; $10,000 minimum; $250 minimum for IRAs), with 21.8 percent three-year returns. Year-to-date: up 2.7 percent.
Finally, one fund offers a new approach to the problem of size. Master's Select Equity (800-960-0188; $5,000 minimum; no load), managed by Ken Gregory, promises to close its doors to newcomers at a level that will preserve the focus of the fund.
But it divides the fund's portfolio among six different top-gun portfolio managers. They will each contribute their best 15 ideas, thus avoiding the problem of a fund loaded with "filler" stocks.