Mutual fund mania: B.E. showcases five of the hottest mutual fund managers who share their investment strategies

Black Enterprise, Oct, 1996 by Juliette Fairley

For millions of americans, the investment vehicle of choice for a healthy portfolio is mutual funds. And why not? Equity funds continue to best the Standard & Poor's 500 stock index: they were up 36% at the end of 1995, compared with 34% for the overall S & P stock index. In the first half of this year, the average stock fund topped 10.8% while the S&P rose only .1%. In fact, a record $138.3 billion poured into equity mutual funds during this period, and the total assets of all funds climbed to $3.18 trillion, according to the Investment Co. Institute in Washington.

Still, with more than 9,000 funds in the market, you may be wondering if you have the right funds in your portfolio. Are they meeting your personal investment objectives, and are they performing well?

Most analysts would agree that a mutual fund is only as good as its manager, the person picking stock for that fund's portfolio. Some fund families--such as Templeton which is value-oriented--have pretty much the same investment philosophy for all of their funds. Others are run independently of the company. Thus, the manager's investment style dictates that particular fund's strategy.

Essentially, the fund manager's job is to balance money flowing in and out of the portfolio and to put incoming money to work according to the fund's investment objectives. "Each [manager] has his or her own approach. Some are value pickers and others look for growth," says Vincenzo Alomia, a research associate in the New York office of Lipper Analytical Services, which tracks the performance of over 9,000 mutual funds.

Traditionally, value investors purchase companies that have fallen out of favor or discover overlooked companies selling at reasonable prices. It's an investment approach that zeroes in on companies that are cheap (their stocks selling at a relatively low price-to-earnings ratio and low price-to-book ratio). Growth investors look for companies whose sales or earnings-per-share rates are growing at an accelerated rate.

The best way to find out about the style and tenure of a fund manager is to read the prospectus, a formal written document required by the Securities and Exchange Commission, that provides background on the fund's managers, history, objectives and other essential data.

But how can you distinguish between a good or poor mutual fund manager? One indicator of a manager's competence is the fund s performance. "It really boils down to whether the person is delivering above-average performance [mutual fund returns average 10%]," says Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in New York, which scrutinizes periods ranging from a few months to up to five years.

Another important indicator is a fund's turnover rate, which measures the number of times a portfolio manager buys and sells stocks during the course of a year. A turnover of 100% means the fund completely changes its holdings every year. A fund that has an excessively high turnover rate--more than 300%--indicates that the manager is more of a trader than an investor, increasing the fund's risk factor.

To shed further insight on mutual fund investing, BLACK ENTERPRISE asked five mutual fund managers to share their take on picking stocks: Garrett Van Wagoner, Van Wagoner Funds; Michael Schonberg, Dreyfus Aggressive Growth Fund; Justin Beckett, Calvert New Africa Fund; C Kim Goodwin, Putnam Vista Fund; and Walt Pearson, Alliance Government Opportunity Fund. These blazing managers offer hot advice--but not the kind to burn any investors.

MANAGER: GARRETT VAN WAGONER FUND: VAN WAGONER FUNDS CATEGORY: SMALL CAP

While the average diversified U.S. stock fund posted a 10.8% gain in the first half of this year, nearly all of the small companies and aggressive growth entries advanced 30% or more. Characteristically, small-company growth funds are volatile and speculative, risking above average losses in order to achieve the highest possible capital gains. They tend to buy stocks in small companies traded on the exchanges or over the counter.

No manager has ever had the best total return of all diversified equity funds for two years in a row, much less three--that is, until Van Wagoner did it in '93, '94 and '95. This top gun cut his teeth managing the $519 million Govett Smaller Companies Fund, which had a 54.7% compound annual return during the first two years and nine months of his tenure.

This past January, Van Wagoner ventured out on his own, starting a family of growth-oriented funds bearing his name: Van Wagoner Emerging Growth; Van Wagoner Micro-Cap, which invests in companies with market capitalizations below $350 million; and Van Wagoner Mid-Cap, which invests in companies with a total worth of greater than $500 million. All three have outperformed the benchmark indexes, with each returning 35% or more. Combined, Van Wagoner manages $1.1 billion m assets.

His hottest fund--up 49.7%--is the Van Wagoner Emerging Growth Fund, which features 110 holdings of fast-growing companies. About 30% of its assets are invested in technology, 45% in health care, 10% in energy services and 15% in various miscellaneous companies.