Where mutual funds got their start
John Laupheimer Jr. manages what he calls an ABC mutual fund - Always Be Careful.
It's Massachusetts Investors Trust (MIT), the oldest mutual fund in the United States. The fund, 75 years old last month, has survived the 1929 stock market crash, the Depression, World War II, the Korean and Vietnam Wars, and the 1987 crash.
"It's quite an honor," says the fund's lead manager.
Of the 7,000 or so mutual funds in the United States, only 10 percent have a 10-year record, let alone a record going back two or three generations.
Mr. Laupheimer recalls meeting a shareholder recently who got her shares before World War II and whose mother had owned shares before that time.
In 1924, MIT's idea of letting shareholders buy or sell shares at a day's closing net asset value - the daily share price - was radical, the first "open-end" mutual fund.
Laupheimer, a graduate of Sloan School of Management at another MIT, Massachusetts Institute of Technology in Cambridge, across the Charles River from his Boston office, took over the fund portfolio in 1992. His investment record is good.
In the past 10 years, MIT's investment performance has kept up with the Standard & Poor's 500 stock index. Few funds can say that. Management fees, subtracted from stock gains, make it difficult to beat the averages.
But starting in the fourth quarter of 1998, MIT has slipped 3 percent behind the S&P 500.
"Recently we have been struggling," says Laupheimer. "It has been a little discouraging."
Laupheimer, though, says he's "fairly confident" that by sticking to MIT's investment strategy, he will catch up with the 500 index.
That strategy is to invest in high quality, large blue-chip stocks - about 100 of them - and hang on to them for, on average, about two years. The fund seeks long-term price appreciation with 5 to 10 percent less risk than the S&P 500. This reduced risk comes from choosing some stocks that have a relatively low "beta" - or price volatility.
A correction catch-up?
With this conservative portfolio, MIT tends to dip somewhat less than the averages in a "normal market correction" of about 15 percent. At that time, MIT's portfolio should make up its performance lag, says Laupheimer.
In any case, Laupheimer's performance has been sufficient to grow the fund's assets from $1.3 billion, when he took over, to $13.7 billion today.
"It's not a gangbuster product" - a hot, risky fund, he says. "But we have created something which people want."
MIT shares are sold through brokers. It has a sales fee ranging from 4.75 percent on a minimum $1,000 investment to zero percent with $1 million. Its annual expense ratio, the cost of buying and selling stocks plus the management fee, is a relatively low 0.9 percent. To obtain a prospectus call 800-637-2929.
Laupheimer reckons that stocks in general have been "overvalued" for the past three years. So, though MIT is fully invested in stocks and intends to remain that way, he has shifted his portfolio a little from growth stocks to value stocks.
Laupheimer sees the S&P 500 stock index (and the popular "index" funds that track the S&P 500) as riskier than it used to be. A higher dose of technology stocks - 17.5 percent today, versus 8.3 percent four or five years ago - creates a higher level of volatility.
Investors should recognize that this index "has changed its character," he says. "It looks more like the Russell 1000 technology index."
So a growth-and-income fund such as MIT, according to the "portfolio theory" of economists, should get a somewhat lower return than the riskier S&P 500.
MIT has outperformed more than 96 percent of its growth-and-income peers in the past 10 years, according to Morningstar. The Chicago-based mutual-fund information service gives it a top rating of five stars.
The fund owns no Internet stocks. Laupheimer suspects that for every one of the new issues that succeed, the price of 10 such stocks will sink to zero.
Many hot stocks, he says, "will take a heck of a beating. MIT is not the place for them."
Nonetheless, Laupheimer regards the Internet as an important business development. "It represents a major change in information availability for society," he says. So he has bought the shares of some companies serving the Internet, such as Cisco or Lucent Technologies.
Asked for a couple of favorite stocks, Laupheimer picks United Technologies and Xerox.
United Technology, with its Pratt & Whitney engine, Otis elevator, and Carrier divisions, is doing well in its repair and service business. Revenues are growing 15 to 20 percent a year, and its price-earnings ratio is 21.5.
Xerox has a new manager and is growing more than 18 percent in revenue a year with a P/E ratio of a modest 15 to 16. The market perceives the stock as risky.
Laupheimer cautions that one of his more than 30 analysts could come in with bad news on one of those companies and he would dump the stock right away.
"I sell when I realize I have made a mistake." Citing a predecessor's investment advice, he says, "You are better off being stupid than stubborn."
As for knowing when the market will go up or down, he says, "I'm as good at market timing as anybody else - terrible."