STOCK FUNDS SEE MASSIVE OUTFLOWS
EX-HIGHFLIERS SUFFER THE MOST IN FIRST QUARTER AS
MARKET TURMOIL SCARES OFF INVESTORS
By Dolores Kong
The Boston Globe
Bear-bitten fund investors ran for cover during the
first quarter of 2001, but there were precious few
places to hide.
Losses across almost all stock mutual fund categories,
from growth to value, wiped out many of the gains from
two years ago, according to preliminary category
averages compiled by Lipper Inc., a New York- based
provider of investment data.
The biggest losers, of course, were the once
highflying funds with the word "Internet" or
"technology" in their names.
"Anything that was wild and woolly is down double
digits," said Donald Cassidy, senior research analyst
at Lipper, where the data show some of those funds
losing more than half their value in the last three
It's enough to spook anyone.
"Investor sentiment is low. People don't want to own
stocks. There's an uncertain economic outlook," said
Paul Herbert, mutual funds analyst for Morningstar,
which rates funds.
That kind of environment is the perfect feeding ground
for bears, of course. As a result, some of the only
equity funds with sizable positive returns last
quarter had names like "Prudent Bear" or "Ursa" or
"Grizzly Short," all of which were in double-digits.
At the same time, investors pulled out $3.07 billion
more from stock mutual funds than they put in in
February - the first time since August 1998 that there
has been a net cash outflow from equity funds -
according to data released last Thursday by the
Investment Company Institute.
That shift is a "classic response" during turbulent
markets, said Chris Wloszczyna, a spokesman for the
mutual fund industry group. He added that the outflow
is more a result of a slowdown in new purchases than
it is a boost in redemptions. February also saw
individual investors sending about $21.6 billion into
money market mutual funds, up from about $20.3 billion
in January, according to the industry group.
Cassidy at Lipper predicted the net cash outflow from
stock mutual funds in March "will probably be
considerably larger, almost certainly a record," to
break the previous one set in August 1998 of more than
But while the 1998 market turbulence was sparked by
such external factors as the Russian debt crisis and
the meltdown of Long-Term Capital Management, the
hedge fund with Nobel laureate economists among its
partners, the current turmoil is a result of "the
market . . . feeding on itself," said Cassidy.
Investors who were once buying on the dips - or at
least not bailing out with the slightest downturn -
are now running scared. The sentiment is "get me out
of here no matter how cheap it is. It happens not to a
few dozen people, but to a few million people," said
Cassidy, the author of such books as "When the Dow
Breaks" and "It's When You Sell that Counts."
Ironically, now may be the time to buy and diversify,
when everyone's in the depths of despair, he said.
"The market always hits bottom just when things are
about the blackest," said Cassidy. "Grit your teeth
and do the right thing in terms of asset allocation."
That means don't just load up on one type of
investment. Spread your assets around to a variety of
equity funds, from growth to value,
small-capitalization to large-cap, domestic to
international, and include some bond funds. With the
recent interest rate cuts, bond funds are one category
that is solidly up this last quarter, despite the
carnage in equities.
And take a long-term view, don't just trade in and out
based on short-term performance.
"You don't want to just look at what did well last
quarter and just jump into it," said Morningstar's
Herbert. If you'd done that last year, for example,
after positive numbers in the first and third
quarters, "you would have lost your shirt in the
second or fourth quarter," he said.
Agreed Wloszczyna: "You have to have a long-term plan
and stick to it."
To remind yourself to think long-term rather than just
short- term, look at performance numbers over the
years and not just over the last quarter, suggest
mutual fund analysts.
For instance, while Lipper's quarterly numbers through
last Thursday show average US diversified equity funds
fell about 14 percent, those same funds went up an
average 11 percent a year over the last five years.
Even the hard-hit growth funds, down about 20 percent
for the quarter, have had average annual returns of
more than 10 percent over the last five years.
And even battered science and technology funds, down
about 34 percent for the quarter, have risen an
average of nearly 14 percent a year over the last five
The Lipper statistics tell the same story for the
nation's 25 largest mutual funds.
Fidelity Magellan, the biggest of the funds, dropped
about 13 percent for the quarter. However, if you'd
bought the fund five years ago and reinvested all the
dividends, you'd still be up about 80 percent on your
Same thing with the number two fund, the Vanguard 500
Index, down about 13 percent for the quarter. If you'd
bought the fund five years ago and reinvested the
dividends, you'd be ahead about 91 percent.
The biggest loser for the quarter among the 25 largest
funds, Fidelity Growth Co., dove more than 26 percent.
Even so, if you'd bought the fund five years ago and
reinvested the dividends, you'd be up more than 105
percent on your initial investment.
And while another former highflier among the 25
biggest funds, Janus Twenty, could be called Janus
Minus Twenty for its nearly 25 percent nose dive
during the quarter, its five-year cumulative
performance is plus 120 percent, including reinvested
Finally, mutual fund analysts suggest that you remind
yourself not to buy whatever the hottest fund is based
on one quarter's or year's return, as so many people
did early last year, when tech was flying high, and as
so many may be tempted to do now, with the bears
climbing to the top of the quarterly charts.
Otherwise, you're "going to buy high, sell low," said