Mile-High Low - blue chip stock investments

Kiplinger's Personal Finance Magazine, Oct, 2001 by Steven T. Goldberg, Erin Burt

FUNDS | An industry giant overdoses on TECH STOCKS, and shareholders pay the price.

A LARGE, distinguished fund group in Denver loads up on hightech stocks. The funds prosper for a time, but then tech stocks plummet. Suddenly the funds, which had been the toast of the mile-high town, look like toast. If you think we're talking about the widely publicized implosion of the Janus funds, think again. A disaster of even greater proportions is taking place at Janus's cross-town rival, Invesco.

As the table on the facing page indicates, it has been a miserable year for Invesco funds that invest in rapidly growing companies. On an absolute basis, the losses have been horrific. That's not surprising when you consider that the sector of the market that encompasses large growth companies has been struggling since the major indexes peaked in April 2000. What's startling is the funds' performance relative to the average returns of similar funds. The Blue Chip Growth and Endeavor funds, for example, trailed the average large-company growth fund by some 26 percentage points over that nearly yearlong period.

By the numbers A year to forget

Below are the results for seven of the 21 Invesco stock funds
from August 31, 2000, to August 15, 2001, along with the average
for funds employing similar investment styles.

                        INVESTMENT     TOTAL     STYLE    ASSETS (IN
FUND                       STYLE       RETURN   AVERAGE   MILLIONS)

Blue Chip Growth       Large Growth    -64.4%   -37.6%      $1,260
Dynamics               Midcap Growth   -48.3    -36.7        6,576
Endeavor               Large Growth    -64.0    -37.6          164
Growth & Income        Large Growth    -51.8    -37.6           91
Small Company Growth   Small Growth    -38.5    -25.6        1,392
Technology             Technology      -64.9    -62.1        3,928
Telecommunications     Telecom         -66.5    -51.7        1,243

SOURCE: Morningstar Inc.

What makes Invesco worthy of scrutiny (in addition to the $41 billion in assets it has under management) is that its growth funds usually provide solid returns. In fact, over the past five and ten years Invesco's growth funds still edge their peers, on average.

Sagging performance

BUT THE MAMMOTH declines are undermining Invesco's long-term results as well. Blue Chip Growth's returns put it in the bottom 10% of large-company growth funds over the past three and five years. Dynamics, Invesco's largest fund, is among the bottom half of funds that invest in fast-growing, medium-size companies over the past three years, even though it remains in the top 40% over the past five years.

The problem is that Invesco's growth managers partied too hard and stayed too long at the disco-tech. "It's tech, tech and tech," says Fritz Meyer, lead manager of Growth & Income, explaining his fund's miserable numbers.

Trent May, manager of Endeavor and co-manager of Blue Chip Growth and Growth & Income, exemplifies the firm's rock-solid, unswerving faith in tech. May keeps a pair of blue dice on his desk, a trinket left by a visiting brokerage analyst. One die has "EMC" on every side; the other offers two choices, "buy" and "buy more." And indeed, whether it's EMC, Cisco Systems or JDS Uniphase, odds are that if it's a big tech or telecom stock, the tall, rugged May has been buying it--70% of Blue Chip Growth's assets are in those sectors. And May is hardly a lone wolf at Invesco. Except for Small Company Growth, all of Invesco's diversified growth funds have wagered 39% or more of their assets on tech and telecom stocks.

Tim Miller, Invesco's chief investment officer and manager of Dynamics fund, admits that he's lost some hair over the past year. But he defends the commitment to tech. Says Miller: "We believe technology and telecommunications stocks will continue to offer the best opportunities for growth. We don't believe this was a bubble that burst and will not recover."

Miller and other Invesco officials are quick to point out that not all Invesco stock funds have overdosed on tech. Under the stewardship of veteran manager Charlie Mayer, Invesco runs three funds that seek to buy companies at bargain-basement prices. Like most value funds, Invesco's have held up decently during the tech sell-off. Even so, when compared with peers, their performance hasn't been anything to crow about. Mayer's $4-billion Equity Income fund, for instance, has lost 13% over the past 11 1/2 months. It has lost less than the average large-company "blend" fund (which is how Morningstar categorizes it), but has done worse than the average big-stock value fund.

But while value funds and a slew of sector funds are important parts of Invesco's business, the firm built its reputation mainly on its ability to identify attractive growth stocks. Invesco's growth managers remain supremely confident in their ability to do just that, their recent travails notwithstanding. There's nary a hint of contrition or nervousness in their voices as they rehash the past year.