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Index funds not a sure bet
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January 31, 1997: 1:53 p.m. ET
They were an easy choice in 1996 but this year the outlook is not very clear
From Correspondent William S. Rukuyser
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NEW YORK (CNNfn) -- Index funds have grown even faster than other mutual funds, but now some Wall Streeters are predicting that the luck has run out.
Mutual fund giant Fidelity vowed 10 years ago this week that it would not start an index fund because "it guarantees mediocrity."
Although index funds today are the swans of Wall Street compared to the most active investment managers, some see troubled waters ahead.
Last year "was kind of unusual in that it was an indexer's kind of market," said David Pearl, senior portfolio manager at Citibank Global Asset Management.
But this year is going to be a stock picker's market, he said.
"Going into January, large-cap stocks had been at a historical high, whereas small and mid-caps were almost at a historical low in valuation," Pearl said.
About 60 of the 175 index funds tracked by Lipper Analytical Services do mimic the big-company stocks in the Standard & Poor's 500-Stock Index.
But the rest don't.
"If someone were of the belief that large-cap stocks were not going to do well in the coming year, they have several alternatives. For one, there are small-cap index funds," said Stephen Ward, chief investment officer at Charles Schwab Investment Management.
In fact, funds track stocks of everything from medium-size companies, growth stocks and value stocks to bonds, Dow Industrials and real estate investment trusts. They also follow U.S. companies and international stocks.
Among the advantages of index funds are low expenses, few taxable capital gains, and a drive to match the chosen index.
"Index funds really deliver what they promised, and you don't necessarily get that with an active manager," said Gus Sauter, index funds manager at Vanguard Group.
"Active managers may change their style somewhere in midstream," he said. "That's a very dangerous approach because invariably people get whipsawed when they do that."
Even some former naysayers are coming around. Merrill Lynch will launch index funds this year. With three already, Fidelity now plans to add three more.
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