What to do when a fund's strategy 'drifts'
John Cabell revels in his mercurial method of investing: "We're out there to make money, not be confined to a style box. We're here to serve our shareholders. "
As co-manager of the USAA Aggressive Growth Fund, part of the USAA fund group (800-531-8319), Mr. Cabell has served his clients well. For the year to date, through Dec. 13, the fund is up 69.2 percent; for the past five years, it's up 33.2 percent.
His secret? A shift in style.
Until a few years back, the no-load fund focused on small companies. Now it buys small, mid-size, and even a few giants to ratchet up performance.
"If you want to be prosperous, you have to adapt," says Cabell, a tall, easy-going chap with a genial Southern drawl. He likens himself to a "ballroom dancer" who knows that for a good performance, he's got to be all over the stage.
Welcome to the world of what mutual-fund guru Sheldon Jacobs, publisher of the No-Load Fund Investor, a newsletter, has dubbed "go-anywhere funds."
Back in the early days of mutual funds, managers would often veer all over the playing field when picking companies. The Fidelity Magellan Fund, under longtime manager Peter Lynch, pretty much bought and sold whatever Mr. Lynch wanted, says Mr. Jacobs.
But all that changed in the early 1990s, when information firm Morningstar Inc., based in Chicago, established its famous "style" box.
The style box has nine sections, showing whether a fund is large cap, mid cap, or small cap in size, and whether it favors growth or value investing - or a blend of the two.
Mutual-fund marketing departments and financial planners tend to like style boxes, since they help differentiate funds to better sell them. Other information firms, including Value Line and Lipper Inc., subsequently established their own forms of style differentiation.
Under most style assessments, aggressive-growth funds are considered to be small-cap growth funds. USAA Aggressive Growth, however, is currently listed as a mid-cap growth fund by Morningstar.
Other go-anywhere funds Jacobs cites include Janus Mercury, Fidelity Trend, Janus Olympus, Fidelity Dividend Growth, and Nicholas Fund.
Most mutual-fund industry experts in recent years have argued that if you buy a fund for a particular style - to match your unique investment goals - you should consider dropping the fund if it strays from its stated style objectives.
Cabell begs to differ with the whole concept of style. Most of 1996 and parts of 1997 were grim periods for the USAA Aggressive Growth Fund, he says. True to its name, the fund had been buying small-cap growth stocks.
But that sector was out of step with the market, which was shifting toward large-cap stocks and some mid-cap issues.
So Cabell and his co-manager, Eric Efron, started buying mid-cap and large-cap growth stocks as well. Since then, the fund has been on a roll. Assets have shot from $280 million in 1995 to more than $1.4 billion.
Cabell and Mr. Efron, along with chief analyst Mickey Brivic, consider themselves futurists. Their fund looks for companies linked to six specific themes: changing lifestyles; corporate efficiency; the telecommunications revolution; corporate consolidations; new products and services; and new computing.
Because home ownership has been on the upswing, the fund has bought Home Depot, Ethan Allen Interiors, and Cost Plus.
Since the population is also aging, the fund has picked up Chico's FAS Inc., which sells apparel designed for middle-aged and older women, and Omnicare Inc., which provides medical products for care facilities.
To choose a company, the fund managers still use basic bottom-up analysis, Cabell says, weighing such fundamentals as earnings growth, marketing strategy, solid management, and lack of debt.
"We look for companies that are growing at least 20 percent a year," Cabell says.
"In terms of return, the fact that the fund has gone into mid-cap and large-cap issues is positive, since these sectors are now doing very well," says Jeff McConnell, an analyst with Morningstar. "But ... what happens when small cap comes back, and large- and mid-cap sectors fall?
"Style drift is not necessarily a bad thing. But for investors who buy a fund believing that it will fill a specific spot in their overall investment plan, it is not a good thing," Mr. McConnell says.
"If you are buying, say, six funds to meet specific investment goals, and a fund drifts, you may not want to keep it," Jacobs says. "But if you are buying only one or two, then the fact that it tends to drift may not matter much, especially if it is making money."
(c) Copyright 1999. The Christian Science Publishing Society