It was with mixed emotions that mutual fund managers David J. Rights and Anthony W. Soslow watched the stock market collapse on Black Monday, Oct. 19. Although they did not know it at the time, the nation's stock funds would lose $45 billion in the next two weeks.
As they stared at their computer screens, where stock prices were displayed, their first emotion was one of relief. Six months earlier, on April 6, they made the decision to sell their $215 million equity portfolio and put the money into Treasury bills and other investments that could easily be turned into cash.
"We knew we were safe," Soslow recalled. But they also were very nervous.
"No matter what side of the market you are on, that kind of volatility is disturbing," Soslow said.
Soslow and Rights run the Rightime Fund and the newer Rightime Blue Chip Fund from their office in Jenkintown, Pa., near Philadelphia.
The Rightime Fund specializes in buying shares in other growth funds. The Rightime Blue Chip Fund, formed in July, was slated to buy blue-chip stocks, but its $17 million has remained in cash.
Selling their shares in April meant that they missed some of the market's gains, Soslow said. But they also missed the huge losses of the last three weeks. "It's better to sell early than never at all," he said.
Because of its cash position, the Blue Chip fund survived the market's rapid descent with a tiny gain of 0.20 percent, while the larger Rightime Fund suffered a small 1.71 percent loss.
Those showings put the two funds near the top of the latest performance listing issued by Michael Lipper of Lipper Analytical Services, who tracks the ups and downs of the nation's mutual funds. The new report covers Oct. 15 through Oct. 29, a two-week period in which stocks took one of the most severe poundings in history.
The latest Lipper chart is not so much a list of winners and losers as it is a list of small losers and big losers. Only seven of the 857 equity funds measured were in the plus column. The rest lost from 0.79 percent to 52.5 percent of their value.
The average loss for all the funds was 20.7 percent in the two weeks. During that period, the Standard & Poor's 500 index fell 17.9 percent, indicating that equity funds as a group did somewhat more poorly than the broad-based blue chips.
A group of 369 equity funds lost between 20 percent and 30 percent, and 90 funds dropped more than 30 percent.
The better-performing funds followed strategies that involved high levels of cash and the use of options, futures and other hedging devices.
The worst performers included many specialty and sector funds that are devoted to stocks of one industry, such as transportation, electronics or brokerage firms.
The best performers and worst performers both included so-called capital appreciation funds, whose sole aim is to maximize gains.
Richard Fontaine, manager of the T. Rowe Price Capital Appreciation Fund in Baltimore, described the strategy of his type of fund as, "Heavy use of cash, rapid turnover and frequent changes in asset allocation mix."
The technique produces a volatile fund that can quickly go from being a loser to a winner and back again. In Fontaine's case, after trailing most other funds all year, he suddenly found he had lost only 8.5 percent during the two weeks when others were losing their shirts.
Leading the winners list were the Oppenheimer Ninety-Ten Fund, which gained 7.9 percent, and the Oppenheimer Premium Income Fund, which rose 4.9 percent. Both funds employ options.
The Ninety-Ten Fund was formed in April and has $2.5 million, while the Premium Income Fund is 10 years old and has $350 million.
Bob Galli, executive vice president at Oppenheimer Management Corp., said that portfolio manager Milton Berg had been extremely bearish for some time, raised his cash levels and spent considerable time persuading other Oppenheimer managers to do the same.
The Ninety-Ten Fund, as its name implies, keeps 90 percent of its assets in money market accounts and invests in options with the other 10 percent. Berg held "put" options on stock indexes -- a way of betting stocks would fall. The options grew in value as stock prices dropped. Berg also took Premium Income to a 90 percent cash level.
A "put" option gives the investor the right but not the obligation to sell a given number of shares at a specific price until a specific date. In the case of a "put" option on a stock index, the investor is entitled to the cash difference between the "striking price" or "exercise price" of the option and the actual price of the index if the index price is lower.
Similarly, the Shearson Lehman Special Sector Fund, with $600 million, and the Shearson Lehman Multiple Opportunity Portfolio, with $550 million, both permit a wide range of investment choices.
The Special Sector fund rose 4.32 percent while the Multiple Opportunity fund was up 0.69 percent.
Michael H. Sherman, chairman of Shearson's investment policy committee and portfolio manager for Multiple Opportunity, said the fund's investment choices were wide open.
"We can invest in anything," he said. The choices include stocks, bonds, currencies, options and futures. Sherman said he made substantial money by selling short $165 million worth of Standard & Poor's 500 stock-index futures. When the value of the futures contracts dropped along with stock prices, Sherman was able to buy the contracts back at a much lower price.
Sherman said his fund's performance was possible because of its open charter. "It motivates you to do things you might not otherwise try. It almost demands that you do it."
On the losing side of the Lipper list, Don G. Powell, president of American Capital Funds in Houston, talked about the impact of the huge selling waves on the American Capital OTC fund, which lost 35.2 percent in the two weeks.
The OTC fund, which had about $50 million after the loss, invests in small, rapidly growing companies, an area that has been in a bear market for several years.
Even so, small growth companies took another hit during the two-week period. They lost 9 percent during the one-week period of Oct. 22 to Oct. 29 as part of a 14.5 percent loss since Jan. 1.
"That segment of the market has been hit the hardest," Powell said. When the market cracked, investors rushed to get out of "the most scary stocks" and moved to safer havens in certificates of deposit and bonds, he said.
Powell, along with most mutual fund managers and executives, reported that while the events of Oct. 19 and 20 caused many shareholders to move out of stock funds, an estimated 85 percent of the money was moved into money market funds in the same fund family.
The mutual fund executives also said the amount of forced selling of stocks to meet shareholder redemptions had not become an overwhelming problem.
Most funds said their managers had sufficient cash on hand to meet redemptions or were able to arrange quick loans to avoid selling stock into a plunging market.
At T. Rowe Price, home to a varied family of funds, vice president Steven E. Norwitz said "there was no forced selling" and that all of the funds had had enough cash to handle redemptions.
L. Erick Kanter, vice president of the Investment Company Institute, the mutual fund trade association in Washington, said that there had been a dramatic increase in assets in money market funds at the time of the market' collapse.
During the week ended Wednesday, Oct. 14, taxable money market funds rose to $247.2 billion, an increase of $1.2 billion, he said.
During the following week, which ended Oct. 21, when the market was falling, the money funds surged to $256.8 billion, an increase of $9.6 billion.
And finally, as of Oct. 28, the total rose $1.2 billion to $258.0 billion.
At the giant Fidelity funds complex in Boston, vice president Rab Bertelsen said that its money market funds shot up from $29.7 billion on Sept. 30 to $33.8 billion on Oct. 30 as investors moved their money from stock to money funds.
While this was going on, the assets of more than 50 Fidelity equity funds were falling because of both withdrawals and falling share prices. The result was to reduce the assets of the stock funds from $40 billion to $27.8 billion, a loss of 30.5 percent.
Bertelsen said Fidelity fielded 409,000 telephone calls from customers on Oct. 19 and 500,000 calls on Oct. 20, far above its normal volume.
Bertelsen said that as a result of the huge volume of fund switches, Fidelity instituted a seven-day settlement rule, meaning that a shareholder who moved his money from a stock fund to money market fund could not use the money for seven days. Normally, the money can be used the next day.
Bertelsen said that of Fidelity's 2.5 million customers, less than 3 percent took their money and walked out the door.