Second-Quarter Mutual Funds Report
No Needle on the Compass
Without Clear Direction on How to Proceed in the Market, Investors Are Left at a Standstill
By Anitha Reddy
Washington Post Staff Writer
Sunday, July 4, 2004; Page F01
Investors have had plenty to agonize about in the past three months. The tension between good and bad news -- between more jobs and continuing terrorist attacks, between healthy profits and rising interest rates -- seemed to paralyze even professional money managers.
All of that unpredictability meant a certain amount of volatility, but in the end it added up to a tepid quarterly performance for mutual funds. On average, U.S. stock funds barely budged in the three months ended June 30, rising just 0.09 percent.
The problem, according to analysts, was that investors were stuck trying to decipher a market that was not headed in any obvious direction. By contrast, last year stocks outperformed bonds, cyclical stocks that mirror the economy did better than steady performers, foreign markets proved sweeter than the U.S. market, small companies beat large companies, and technology shares led the way.
James W. Paulsen, chief investment strategist for Wells Capital Management, described the 2003 market as "compiled by trends."
"You were either on the right side or the wrong side," Paulsen said. But this year, he said, "none of those trends are clear at all."
Several analysts traced the indecision holding the market hostage back to the heady days of the technology bubble. At that time, they said, even an amateur could have studied a few charts and concluded that technology stocks were grossly overvalued and that stocks of smaller companies with steady profits were equally undervalued. The countermove was clear: Sell off the expensive stuff, buy up the cheap and neglected, and watch your portfolio swell.
As technology shares fell out of favor, their prices fell and no longer seemed so exorbitant relative to their earnings. As investors bid up the stocks of smaller companies overlooked during the dot-com craze, those shares became less of a bargain.
The result was a market more fairly valued overall -- and drained of bargains. Small-cap value funds have returned 11.2 percent over the past three years, while large-cap growth funds fell 5 percent and the overall market dipped 0.1 percent.
"There are no more 'gimmes' in the market," said Marian Pardo, one of three managers of Credit Suisse Asset Management's $100 million small-cap growth fund.
Pardo's sentiment is reflected in the returns of the major mutual fund categories. No matter how the data are sliced, average returns for diversified stock funds stayed within a narrow band of plus or minus 1 percent.
© 2004 The Washington Post Company
Investors who want to avoid relying on recommendations that may be influenced by incentives paid to brokers have several options:
• Doing it themselves. The SEC and the mutual fund trade group the Investment Company Institute provide a range of mutual fund publications and a series of calculators that help investors determine which funds have lower fees (www.sec.gov/investor.shtml and www.ici.org).
The big mutual fund companies that focus on direct sales to investors -- Vanguard Group, T. Rowe Price and Fidelity Investments among them -- also offer investor education products on their Web sites.
• Opting for a fee-only planner who charges for specific services rather than accepting commissions from mutual funds. The National Association of Personal Financial Advisers has a referral service on its Web site (www.napfa.org).
• Some brokerage firms now offer a "wrap account," in which they forgo or reduce commissions on fund sales and instead charge annual fees -- often 1 percent -- based on the value of assets they are managing for an investor.
-- Brooke A. Masters and Lauren Bayne Anderson