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NewFund Focus – e-Version Issue # 28 December 2000$6 per issue
Annual Subscription $72 “But
Doctor - if I can’t eat and I can’t drink, how
can I be merry?” Recommended Funds Performance-Prices for week ending Dec. 1, 2000
Year-to-date
Returns DJ Industrials: - 9.77 % S & P 500 - 10.48 % Nasdaq Comp – 34.99 %Russell
2000 - 9.49 % MCSI EAFE (Foreign stocks) – 16.88 % “I hate elections. Half of the bastards always win.”
Aynsley Tweddell
But not quite yet. One of the reasons we’re swimming in an ocean of red ink is that we still don’t know for sure who won. Making things worse is that while most voters concede privately that they have doubts about their guy, they make no bones about their almost visceral loathing for his opponent. Toward the end, the choice seemed to polarize into two extremes: The Liar or The Lightweight? When it’s finally decided, even though the pols will publicly be making nice, half of the folks will probably harbor a suspicion that the election was stolen. The other half will have their fingers crossed, hoping that most of the electioneering accusations about their guy prove false; because if not, in the words of George Bush Sr., we’re all going to be in “deep doo-doo.” Of course the third half – who didn’t vote – may have some opinions, but who cares? The election turmoil doesn’t breed confidence and optimism, drivers of rising stock prices and valuations. But the real reasons for rancid returns are interest rate hikes, the slowing economy and earnings disappointments. And the reason the Nasdaq correction has been so painful – an historic 50% drop from its highs – is that new era valuations were so inflated. The Wall Street Journal (11/27) provided a helpful chart of price-to-earnings multiples of technology and non-technology stocks in the S & P 500 going back to 1990 (I’d love to reproduce it, but obtaining permissions from the Journal is time-consuming and expensive). From 1990 to 1994, technology stock multiples were actually lower than non-technology stocks. From 1994 to 1998, technology multiples rose to 20% to 40% premiums over non-tech stocks. In mid-1998 tech multiples exploded - climbing to a peak of approximately 45 – three times the multiple of non-tech stocks. When the bubble burst in early 2000, tech stocks’ collapse reduced their multiple by half to the mid-20s. Meanwhile, non-tech multiples rose from only the low- to the mid-teens. In addition to showing the fabulous returns non-tech investors missed during the 1990s, the chart shows tech-less stocks are not overpriced – they are selling at stocks’ average price earnings (mid-teens) multiples of the last 100 years. Even as the Nasdaq systematically impoverishes tech late-comers, you could make the case that tech-less stocks are relatively “safe.” Revenge
of the Know-Nothings As hard as it is to imagine, there are actually some folks who have made modest money this year, the disparaged class of “Know-Nothings” - value investors. Just this week, the Oakmark family of funds, delivered their 2000 Annual Report for the period ending September 30 and it makes good reading (for the few who remained). You may recall that Robert Sanborn, portfolio manager and former all-star manager of The Oakmark Fund got the gate this year, within days of the turn-up of small-cap stocks as did other former all-star value fund managers. I was one of the early investors in Sanborn’s fund at its launch because I had known about management’s reputation as astute value investors. The first four years were bountiful – he beat the S & P by a wide margin, and as a result, assets grew 1000-fold to over $8 billion. Sanborn interviews and profiles appeared everywhere – he’s an interesting guy with definite opinions and it made great copy. I sold Oakmark, however, because I didn’t believe that the former small-cap value fund could continue to do nearly as well as a large-cap fund, which their asset size required them to be. I had no premonition that the value sector would turn out to be so dreadful. Oakmark Fund, and their other funds’ returns, have improved markedly this year as shown by the following table as shown in their Annual Report: (Oakmark)
Domestic Funds % return from
market peak on March 10
to September 30, 2000 The
Oakmark Fund 24.88% The
Oakmark Select
Fund 19.90% The
Oakmark Small
Cap Fund 18.06% The
Oakmark Equity &
Income Fund 14.82% S
& P 500 3.60% Nasdaq Composite (27.18%) I’ll leave forecasting as to whether superior returns from the value sector continues, but valuations at the end of September, shows that value’s relative value, if you will – particularly in the small-cap sector – endures. But value is relative – on an absolute basis, compared to P/E ratios that averaged 14x during the last 100 years, even value stocks aren’t dirt cheap: Morningstar
Fund Category Price-Earnings Ratios September 30,
2000* Large Cap Funds Growth 43.5x
Value 25.4x Mid-cap Funds Growth 43.4x Value 22.9x Small-cap Funds Growth 39.8x Value 19.3x * Source – Morningstar Principia Pro Plus for Mutual Funds It would not be unheard of for value to return to favor. JP Morgan has tracked seven “selected asset class returns” since 1980: The Russell 2000 Value and Growth Indexes, The S & P/BARRA Growth and Value Indexes, The S & P 500, the MSCI EAFE Index (foreign stocks) and the Lehman Brothers Aggregate Bond Index. Two are value sectors – the Russell 2000 Value Index (small-cap stocks), and the S&P BARRA 500 Value Index (large-cap stocks). During the last 20 years, in a little over half of the years (eleven) at least one of the value sectors – or both - delivered returns that ranked # 1 or # 2. However, viewing each decade’s returns shows how markedly different they were. In the 80s, value showed up at or near the top in six out of ten years. In the 90’s value won in only three years, and only early in the decade, years 1991 through 1993. During the last six years, neither ranked # 1 or # 2. Does that mean that a meaningful period of value outperformance lies ahead? I have no idea, but a look at history shows what tech zealots found out this year: Cycles happen - Wall is not a one-way Street. It’s
the sector, Stupid… So where do we go from here? By any measure, the 50% Nasdaq decline has been of historic proportions. The only two comparable events during the last 20 years were 50 – 60% meltdowns of Asian stocks in the 90s and prior to that, the Japanese stock crash in the late 80s. An assumption that our sector market crash won’t be substantially worse than those would put the bottom somewhere between right here and down another 20%. If so, a guesstimate – not a forecast – would put it somewhere between where we are today with the Nasdaq in the mid-2500s, and Nasdaq 2000, 20% lower. Simple math dictates that it’s time to become less – not more – bearish. If most of the damage has already been done, it’s time to look at NFF-recommended funds to see whether there are any dogs that need to be replaced. Despite the recent market weakness, subscribers remain in good shape, having sold five funds in the August – October period with gains averaging 82.1%. As always, the most important consideration is sector. While some funds use Morningstar categories to measure their relative performance, others use Lipper Analytical Services or the Russell indexes. Some phone reps have daily up-date statistics; others have only those from the end of the previous month, so the results are not shown in a uniform manner. Even so, the intent is to uncover those that should be put out of their misery, not to win an award for statistical consistency and tidiness. Comments and performance comparisons are the best and most recent I could cobble together using fund web sites, Morningstar Principia Pro For Mutual Funds and/or contacts with the funds. What is most encouraging about the results of the funds reported below is that it while the world views them as untried, unproven and above all, risky, on average they turned in credible performance in a very hostile environment. Not one can be called a disaster, which is more than can be said for some formerly “hot” older funds. Further, reasonable asset allocation shielded investors from Johnny-One-Note tragedies in the difficult environment. Technology
Stock Funds Obviously, technology was the worst place to be in 2000 – the damage was widespread, with the worst carnage suffered by dot-com stocks, down by more than 70% on average with many dot-coms disappearing completely off the face of the earth. Calamos Convertible Technology – As of December 1, the fund was down 23.5%, which doesn’t seem like it provided much of the downside protection that I have been crowing about. However, a rough eyeballing of the Nasdaq’s decline during the same period appears to show a drop of approximately 40%. Not to be forgotten are the fund’s fixed income characteristics, which should kick in further if tech stocks continue to tank. I’ve inquired as to specifics - the average dollar price of bonds in the portfolio, yield, average maturity, etc. If management discloses them (they don’t have to – they are only legally obligated to do so every six months), I’ll report it in the next issue. MFS Technology – Although the fund debuted to the public on April 1, Morningstar provides figures going back to 1997, because prior to its public offering, it was an in-house incubator fund. The fund provides year-to-date performance, which is impressive, except you couldn’t have owned it that long. Be that as it may, as of October 31 (the latest available figures), year-to-date returns were plus 17.16 % versus minus 27.25 % for the Lipper Science and Technology Fund Average. Neuberger Berman Technology – As of December 4, the fund’s since-inception (May 1) return has been minus 27.5%, compared to the Nasdaq Composite’s decline of minus 32.9%. From watching its week-to-week volatility, compared to the other two tech funds, I am least comfortable with this one. Recommendations – I have to
assume (or hope) that you followed my asset allocation advice when I first
added technology funds in April: “Don’t
abandon your overall asset allocation; tech is optional – like dessert –
and only after a well-balanced entrée.
Don’t overdo it.” To me, it
seems too late to sell. And if you don’t own any technology, Calamos
Convertible Technology is a good “chicken” way to get started. Large-cap
Stock Funds According to their sponsors, both large-cap funds were supposed to be mid-cap stock funds at inception, but somehow they ended up in the Morningstar large-cap category. As of November 30, Lipper Analytical calculated that large-cap growth funds were down 19.18%, large-cap core funds were minus 8.49 % and value funds were down 1.99% Growth - Marsico 21st Century – Both Lipper and Morningstar calls this a large-cap growth fund. Launched in February, the fund considers the S & P 500 Index to be its benchmark. Inception-to-date returns as of December 4 were “only” minus 12%, somewhat remarkable considering their phone rep’s insistence that the fund has a 63.2% technology weighting – double that of the S & P 500. Value - Janus Strategic Value – One of the few funds in the black, you need look no further than the “value” label to understand why. Janus uses the S & P 500 as their performance bogey, but they don’t have apples-to-apples period comparisons. As of December 4, the S & P was down 8.8 %, while Janus Strategic Value (launched February 29) was up 4.4%. Recommendations – Considering
their sectors, both funds have turned in respectable relative performance. Hold until they near their 18-month marks
and new-fund replacements are made. Mid-cap
Stock Funds Blend - Oppenheimer Main Street Opportunity Fund – Launched a little over 60 days ago, it calls itself a “multicap core fund,” with the Russell 3000 index as its benchmark. As of October 30, it was lagging the Russell 3000’s performance slightly, with a minus return of 2.20% versus minus 1.40% for the index. Because of the strategy described in the October recommendation, and management’s unusually long record of consistent outperformance, this is my top pick among previous recommendations for adding new/more money. Recommendation – Buy/hold Small-cap
Stock Funds Value – Nationwide Value Opportunity Fund – Year-to-date returns are plus 20.60 %, double the returns of the Lipper Small Cap Value Fund Average. Subscribers’ returns, while good, are not as high because the buy recommendation was made in May when the fund was already five months old. However, total assets of all share classes are a deliciously small $8.6 million – galaxies away from “the size problem.” Growth – Managers Small Company Fund – This fund has two managers, one with an all-out growth mandate and the other who invests with a “growth with value” strategy. As of September 30, before the most recent market drop, it had posted a + 1.1 % inception-to-date return versus the Russell 2000, its benchmark, which was unchanged. The fund’s phone reps were unable to provide more current relative performance statistics. Growth - Oppenheimer Main Street Small Cap Fund - As of October 31, the most recent statistics available, the fund’s since-inception return was 48.18%, versus the Russell 2000’s return of 12.44%. Assets of all share classes (10/31) totaled $360 million which might begin to dampen a small-cap fund’s performance, however, the fund holds over 300 stocks, which should delay the onset of the size problem. Blend - AIM Small Cap
Equity Fund – This fund launched just as stocks were rolling over for
the precipitous September-October plunge.
As of November 30, inception-to-date negative returns were – 13.3%
versus the Russell 2000’s – 12.0%. AIM
apparently has some significant marketing muscles – in spite of a dreadful
environment and negative returns, they have managed to garner assets of $43
million. Recommendations – Considering
their sectors, all funds have turned in respectable relative performance. Hold until they near their 18-month marks
and new-fund replacements are made. * * * * * * * * My wife, Deb, who proof reads each issue, says this one is “rough going - no fun.” Considering the topics covered, her reaction is not surprising. Anyway, Happy Holidays and may the new year provide a more benign investment landscape.
December 4, 2000
Copyright 2000 * * * * * * * * Update – December 6, 2000 Yesterday’s explosive rally, that tacked on the greatest Nasdaq point and percentage gains in history, don’t change any of the recommendations made in this month’s issue. Obviously, tabulated returns have improved considerably. Calamos
Convertible Technology Fund Unlike many fund sponsors, Nick Calamos was kind enough to provide a detailed and timely response to my inquiry about Calamos Convertible Technology Fund mentioned earlier (figures as of December 5 – after the Nasdaq rally). Performance
to date since inception versus benchmark (8/24/00 to 12/04/00): Nasdaq Composite down 35.47 % Calamos Cvt. Technology down 19.00 %
Nick added the following comment: “One important part of our story is the cash flow. Since the correction occurred over only a two month period, only a portion of the total benefit has a accrued to CAM’s tech fund investors. Should the Nasdaq remain down over the next year, our portfolio will tack on another 6% [from interest payments on the bonds]. So [if at the end of a year] the Nasdaq [was still] down 35%, we would be down 13% or just about 1/3 of the Nasdaq’s decline. This emphasizes the full benefit of convertibles.” I had inquired about the fund’s fixed income characteristics. It should provide some reassurance: Yield to Maturity 6.64 % Time to Maturity 5.23 years Price of average bond versus par 38 % selling between 80 – 100% of par 38
% selling below 80% of par |
[Tweddell.com] [Top Funds Study] [Biography] [Mutual Funds] [New Fund Focus] [Response]
