|
Fund managers due a break
|
 |
December 29, 1998: 11:01 p.m. ET
Market rotation should aid small-cap, value stocks, Morningstar chief says
|
NEW YORK (CNNfn) - Active money managers are due for a comeback, a leading observer of the mutual fund industry said Tuesday.
Even though index funds - unmanaged portfolios that simply seek to match the performance of market benchmarks such as the Standard & Poor's 500 - have beaten the performance of actively managed funds for five consecutive years, the situation should change as smaller-capitalization stocks, and those with less-lofty valuations, come back into favor, said Don Phillips, chief executive of the Morningstar fund-watch group.
He did not, however, say when that market rotation might take place.
Here are highlights of his interview with host Jan Hopkins on "The Moneyline News Hour with Lou Dobbs":
JAN HOPKINS, HOST: Let's look back to 1998. This is the fifth year in a row that funds managers have lagged the indexes. What's going on?
DON PHILLIPS, MORNINGSTAR, CHIEF EXECUTIVE: Well, the fund industry is not making a good case for active management. Five years running, you're starting to get this embedded sense with a lot of investors that funds always trail the index, and that's not the case.
What it is, is that active managers have been trained in our universities, from every academic study that, in time, being more small-cap oriented and being more value oriented is the way to beat the market. And what we've seen this year again is a prolonged period where the biggest and priciest companies continue to get the best returns.
Managers have been trained not to buy those companies, to be wary of that, and not doing that has really hurt them in performance relative to something like the S&P 500 index.
HOPKINS: And so the funds managers that bought the Internet stocks that seemed to be overpriced did well?
PHILLIPS: Exactly. A lot of managers were making the case three or four months ago that even after the correction in August, a lot of these stocks were still absurdly overpriced and those stocks have gone on to double, triple or quadruple in the three months since. And a lot of managers trained in this historical value-oriented way of looking at stocks, they're saying this makes no sense, I'm not going to buy these stocks. And in 1998, at least, that was the wrong call.
HOPKINS: Well, Ralph Acampora was saying that 1999 should see a broadening out of value across the board. What do you see for '99?
PHILLIPS: Well, I think Ralph's on track. We're hearing from a lot of fund managers that they think that's going to be case. Certainly we've already seen some inklings of that, where the market leadership has begun broaden a little bit in recent months. We're starting to get better returns from those managers who focus on mid-cap and small-cap stocks.
And certainly the argument that the small-cap managers are making today, saying on a relative basis our stocks are so cheap relative to those stocks on the S&P 500, that's a very compelling argument. And I think in time, the valuation disparity will correct, and you will see a greater performance from the mid-cap and small-cap arena.
HOPKINS: What advice do you have for investors? Should they be loading up on the funds that have done the best or looking at the ones that have lagged?
PHILLIPS: I would actually be looking more at the ones that lagged. The old saying, no tree grows to heaven, is really an important one here. I wouldn't abandon those. It's a tough call to say when this large-cap dominance is going to end. What I would do is simply trim back some of those areas that have done well for you.
I'd be especially wary if you owned these stocks that doubled or quadrupled in a couple months. I mean, that's not sustainable performance. Use this wonderful opportunity you have to pull back on those and look for bargains in some of those areas that haven't participated in the success.
HOPKINS: Emerging market funds?
PHILLIPS: If you got the guts, emerging market funds, absolutely.
And one interesting way to play those are through some of the closed-end funds that invest in emerging markets. Not only have these emerging markets themselves been beaten down, but the closed-end funds are trading at substantial discounts to the net asset value to the fund. Which could give you a double whammy, as it were, when and if the situation corrects.
|
|
|
|
|
 |
|
