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Losing with a winning fund
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January 9, 1997: 2:19 p.m. ET
Hot funds can be deceptive for investors who jump in late in the game
From Contributing Editor William S. Rukeyser
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NEW YORK (CNNfn) -- The stock market certainly bounded ahead in 1996, but the cheering had a bitter ring for investors whose mutual funds didn't keep pace.
Among the most frustrated were those who bought the right fund at the wrong time. Experts say many made the mistake of listening to the fund boast about its success.
"As an arithmetic proposition in many mutual funds, chances are that by the time the great performance has been registered, you, the public investor, are only entering," said James Grant of Grant's Interest rate Observer. "You're coming in for the last of it."
The fund trackers at Morningstar Inc. recently looked at more than 700 small-capitalization funds -- those that buy stocks of smaller companies. They listed the 15 best performers between January and May 1996 and the 15 worst between June and early December.
Amazingly, seven funds appeared on both lists. The Dreyfus Aggressive Growth Fund, for instance, rose 16.5 percent over the year. That dull but respectable performance concealed a 67.6 percent bonanza for lucky investors in the first five months and a 30.5 percent swoon for those who climbed aboard in June.
So beware of short-term performance claims, especially from new, small funds investing in volatile securities. Consistency beats flash, a point New York money manager Michael Harkins underlines with a parable of two money managers.
One makes 15 percent a year for 10 years, Harkins explained. The second makes 20 percent a year in eight years and loses 20 percent in the other two years.
"The mind's eye tells you they're at the same place at the end of the decade. In fact, the first fellow has 53 percent more money. However, the second fellow has a much bigger money management business, because he had bragging rights for 80 percent of the time."
Think about it. Maybe you, too, will decide it is better to be the tortoise in the next race -- instead of the hare.
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