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Funds are down but not out
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October 8, 1998: 11:27 a.m. ET
Despite outflows and losses in stock funds, experts are hopeful
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NEW YORK (CNNfn) - Investors siphoned $11.2 billion out of U.S. stock funds in August as a market correction hammered Wall Street -- but mutual-fund experts remain optimistic that the industry will rebound.
In fact, industry experts argue that the August outflows were only 0.4 percent of the total assets in the previous month, meaning most investors stayed put.
"People are still long-term investors and stocks are still the best way to go," said David Brady, senior vice president at Stein Roe Capital Management, a fund company based in Chicago.
Yet stock funds are clearly suffering after losing an average of 16.71 percent in August, according to statistics compiled by Lipper Analytical Services.
Stock funds gained an average of 5.88 percent in September, leaving the third-quarter with losses of 15.02 percent.
Hard times
Several small cap funds that closed to new investors have reopened recently. The funds had closed during the bull market because they were attracting too much money. The bigger a small cap fund, the harder it is to manage.
Small caps have led the way during the correction, with the Russell 2000 index of small company stocks hemorrhaging 23.91 percent this year.
Among the funds that reopened are the Wasatch Micro Cap Fund (WMICX) and Wasatch Aggressive Equity Fund (WAAEX), Oakmark Small Cap Fund (OAKSX) and Montgomery U.S. Emerging Growth Fund (MNMCX).
"The sentiment is so horrible among investors that it's created an environment where there's so little competition that we felt there was a lot of opportunity," said Steven Reid, manager of the Oakmark fund. The fund had assets of $1 billion when it closed in June 1997. As of Tuesday, assets totaled $643.5 million and the fund is down 29.87 percent for the year.
Laura Lallos, a senior analyst at Morningstar, a Chicago mutual-fund tracker, said small cap funds offer an investment opportunity for the brave.
"Whether people are going to be busting down the door (at the small cap funds) is another thing," Lallos said. "It's tempting to think small caps can't go down any more, but I'm not convinced."
What next?
Lallos said one result of the August numbers is mutual-fund companies will likely be emphasizing bond funds and money market funds.
"I think the industry is pretty resilient," Lallos said. "It's not as though investors who are scared need to retreat to their bank accounts."
Sheldon Jacob, editor of the newsletter No-Load Fund Investor, thinks the August outflows are more a signal of soft sales than of widespread investor uncertainty. Although stock funds haven't seen outflows in eight years, he's optimistic. He believes September will start to show modest inflows. (Figures won't be available until the end of October).
"Equities are still the best game in town," Jacob said.
Brady, portfolio manager at Stein Roe's Large Company Focus Fund and Young Investor Fund, thinks the August losses aren't an indicator of the arrival of hard times for mutual funds. Rather, he said the data shows a return to more realistic numbers after three years of stellar earnings. What lies ahead? Returns in the range of 10 to 12 percent.
A few companies are even introducing new funds, Jacob said. One newcomer is the Strong Enterprise Fund. Acorn Funds is introducing two new funds on Nov. 23 -- the Acord 20 Fund and the Acorn Foreign 40 Fund. The funds don't have ticker symbols yet.
History repeats itself?
Investors who remain uncertain about the future might want to look at the past. After both the 1987 and 1990 stock market corrections, a turnaround happened within several months, said John Rekenthaler, research director at Morningstar.
Jacob pointed out that the outflows following the October 1987 correction were much worse than the August outflows -- roughly 3 percent of the assets during the previous month.
And while outflows continued for about a year after the 1987 crash, investors learned their lesson in 1990 and quickly returned to mutual funds, Rekenthaler said. He thinks the same thing will happen this time.
"This isn't the kind of industry where half the companies are going to go bankrupt in a recession," Rekenthaler said. "They're in good shape to weather a downturn."
-- by staff writer Martine Costello
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