Weatherproof Your Investments - Statistical Data Included

Kiplinger's Personal Finance Magazine, March, 2001 by Jeffrey R. Kosnett

FUNDS | Few managers excel in DIFFERENT CLIMATES.

THE STOCK market's wildly divergent results in 1999 and 2000 cast a new light on the concept of the all-weather fund. It's no longer just a matter of finding funds that keep you dry during market turbulence. Nowadays, you'd like to own funds that can withstand the gusts created by sudden shifts in preference for different investment styles.

In the past, the all-weather tag has been applied to funds that are designed to catch some buzz in good times but avoid danger when stocks tumble. Often they are hybrids, such as balanced or asset-allocation funds, that own a combination of stocks, bonds and cash. But over the past two years, the fund world's major schism hasn't been between hybrids and fully invested stock funds. It's been between managers who buy cheap merchandise and those who invest in high-priced growth stocks.

For instance, funds that invested in large, fast-growing companies returned an average of 36% in 1999; by contrast, funds that invested in large, undervalued stocks returned a mere 6%. Last year, large value funds again returned 6%. But that return trounced that of large growth funds, which lost an average of 13%.

The sad truth is that relatively few funds performed well both years. But there were some exceptions, raising the question of what their managers knew or did that the great unwashed masses didn't.

Actually, you could argue that there is one weatherproof stock-fund category: health care. Last year, health-sector funds posted an average gain of 55%, the sixth straight year of double-digit returns. The largest, Vanguard Health Care (800-635-1511), not only earned 61% in 2000, but has further distinguished itself by falling no more than 11% across any three-month interval for the past four years--astonishing consistency for an aggressive fund. But health funds are by nature growth investments and, despite their consistent gains in recent years, carry above-average risk. Who could forget their miserable results in 1992 and 1993 (two years of modest gains for the overall market) when investors worried that the Clinton administration might try to nationalize the health care industry? The average health fund lost 7% in 1992 and eked out a 4% gain in 1993.

Two-year winners

THE MORE intriguing question is whether any diversified stock fund can stay dry in starkly dissimilar climates. We wondered, for instance, how many diversified funds returned 20% or more in both 1999 and 2000? The answer: just 41. We narrowed our criteria to include only no-load funds that are open to new investors, had the same manager over both years, and let investors open an account with $25,000 or less. Just ten funds met the cut.

One fund that has shown a knack for shining under a variety of conditions is Meridian Value (800-446-6662). Meridian returned a hefty 37% last year, on the heels of an impressive 38% gain in 1999. Even more amazing, it has never returned less than 19% in any of its six full years of existence. It gained 13% during the technology-stock bear market, as the Nasdaq Composite index plunged 55%, although it did lose 23% (versus a 19% drop for Standard & Poor's 500-stock index) in the brief 1998 market setback. (For a look at how the largest stock funds performed during the Nasdaq rout, see the table).

Manager Kevin O'Boyle moves in and out of the depressed stocks of companies that are coming off "two, three or four quarters of disappointing operating results." The fund prospered in 1999 from the recovery of telecommunications stocks after financial problems in Asia, and then rose in 2000 on the strength of gains in health care stocks. "We haven't been tested in a recession," O'Boyle says, but he figures Meridian's "downside exposure is less than average" compared with most stock funds. The fund invests mostly in smaller stocks, though it can own stocks of any size.

Another fund on the 20-20 list is FMI Focus (800-811-5311). It scored a 23% return last year following a 54% outburst in 1999. It held its losses to a modest 11% during the 2000-01 Nasdaq debacle and dropped 18% during the 1998 correction, a smidge better than the S&P (see "Six Ways to Beat the Street," Jan.).

Indeed, analyst Glenn Primack describes himself and the fund's manager, Richard Lane, as chameleons who are able to invest in a wide spectrum of stocks depending on what they consider to be most attractive. Both a company's growth prospects and the underlying stock's price are "really important to us," adds Lane. Concern for price is one reason FMI Focus performed as well as it did last year, says Lane, because he and Primack jettisoned many of the tech stocks that had boosted returns in 1999. Otherwise, the pair look for companies with good profit margins, growing market share and "smart and motivated management," as Lane puts it.

All the other funds in the 20-20 club specialize in small or midsize stocks, a reflection of the general strength in those sectors over the past two years. They are: Alleghany Veredus Aggressive Growth (800-992-8151), Artisan Mid Cap (800-344-1770), Berger Mid Cap Value (800-551-5849), Bjurman Micro Cap Growth (800-227-7264), Buffalo Small Cap (800-492-8332), Dreyfus Mid Cap Value (800-645-6561), TCW Galileo Value Opportunities (800-386-3829) and Wasatch Small Cap Value (800-551-1700).