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Winning with losing funds
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June 10, 1999: 11:05 a.m. ET
Precious metals, health care and Europe stock funds are down the most in '99
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Health sector mutual fund returns may be on a respirator these days, but portfolio manager Dan Gillespie said investors should get off the death watch.
While his four health care and biotechnology funds at Rydex Funds are in one of the worst performing categories this year, Gillespie says the prognosis is good. Drug makers have new pills to fight cholesterol and heart attacks, and biotech companies are prime takeover targets.
"In the long run, this is a good sector to be in," said Gillespie, senior portfolio manager at Rydex who oversees 15 sector funds.
The dogs of mutual funds '99
Health care funds are down an average of 4.82 percent year to date as of May 31, delivering the second-worst returns of the year, according to fund-tracker Morningstar. Precious metals top the list, with losses of 5.60 percent because gold prices are at a 20-year low.
Long-term government bond funds and European stock funds are also at the top of the list of losers, giving up 4.59 percent and 3.89 percent year-to-date, respectively.
While funds with poor returns won't wind up in flashy ad campaigns, some of them can be a good bargain for investors who can stand buying something that's losing money, industry experts say.
For example, real estate mutual funds suffered big losses in 1998, but they're the 10th best performers this year with average returns of 7.57 percent, according to Morningstar.
"With real estate funds, you'd be better off buying them after a bad year," said Russ Kinnel, editor of mutual funds at Morningstar.
Latin America stock funds also bled last year, but they are the No. 1 category in 1999 with profits of 21.40 percent year to date. Emerging markets, another dog of 1998, are second on the list with average returns this year of 20.47 percent.
"Conventional wisdom is that you should buy things when they're down, not when they're up," said Michael Winer, co-portfolio manager of the Third Avenue Real Estate Fund. "A lot of investors unfortunately get in at the top and get out at the bottom."
The Third Avenue fund, though tiny with $7 million in assets, is up 16 percent since it launched in September 1998 when real estate stocks were falling. The fund is up 8 percent year to date.
"Now is a terrific time to get into these stocks that have been beaten up so much in the last year or so," Winer said.
A little perspective
Kinnel said nearly every category, even those with good long-term performance like technology funds, will have a short-term downturn from time to time. (He defines short-term as one to three years.)
"A single year's return shouldn't play a big part" in an investor's decision-making, Kinnel said.
But mutual-fund companies don't always make it easy for investors to stick with a strategy that is in the red, Kinnel said. Some fund companies, for example, merge a loser fund into another fund with a different investing objective instead of sticking with the style. Instead, they should merge it with a fund that has a similar objective -- or find an outside adviser to take over, he said.
"If someone has the guts to stick it out (in a loser fund), you shouldn't punish them," Kinnel said. "You should take care of your shareholders. That way you're practicing what you're preaching."
What should you do?
Kinnel said investors should choose sector funds in broader categories such as technology, health care and financials. By contrast, precious metals or environmental funds are too narrow.
Mark Balasa, a financial planner at Balasa & Hoffman in Schaumburg, Ill., said investors in poor performers need to ask themselves if their reasons for buying shares are still valid.
"Make sure it still fits an investing objective you had," Balasa said.
Kinnel agreed. He recalled that he bought a specialized energy fund in the early 1990s based on the premise that growth in Asia would drive up energy prices because the region did not produce energy.
"A year and a half ago I realized that it wouldn't happen in the next few years," Kinnel said. "I sold the fund. It had decent returns, but it was time to move on."
Balasa said investors should look at how their fund is doing compared with other funds in the category.
"You might find your medical fund is down 10 percent in the last three months, but the average fund is down 15 percent," Balasa said. "That makes your fund pretty good, and a reason to hold onto it."
But if your fund is lagging others in a beaten-down category, then it may be time to move on, Balasa said.
Investors can use the opportunity of a downturn to rebalance their portfolios, Kinnel said. For example, you can boost your allocation in small cap value funds, a sector that has lagged in the past 12 months. Or you can move into bigger funds in the same category to keep expenses down.
You also can keep an eye out for fund companies that launch new funds in a sector that's down, such as Winer's Third Avenue Real Estate Fund, Kinnel said.
"It's a really good sign when you see something like that."
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