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Large growth funds in Q3
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July 9, 1999: 5:15 p.m. ET
Despite lagging returns in Q2, managers are optimistic for the future
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Large cap growth funds fell off their pedestal with a thud in the second quarter, but fund manager Spiros Segalas said reports of their death are greatly exaggerated.
Segalas, manager of the $6.2 billion Harbor Capital Appreciation Fund, said the underdogs that soared in the past three months won't reign for long.
"Over time, growth always wins," Segalas said.
The Harbor Capital Appreciation Fund is among a number of large cap growth funds that are up 20 to 30 percent year to date as of Thursday, even though average returns for the category were only 3 percent in the second quarter, according to fund-tracker Morningstar.
Segalas, whose top three stocks are Microsoft (MSFT), MCI WorldCom (WCOM) and Cisco (CSCO), said he sees plenty of opportunities in the sector. The fund earned 4.86 percent in the second quarter and is up 19.43 percent year to date as of Thursday, putting it six percentage points ahead of the S&P 500, Morningstar said.
"I still think technology is going to do quite well," Segalas said. "The telecom sector has great opportunities as well."
He also owns big bank stocks like Citigroup (C) and Chase Manhattan Bank (CMB). He thinks the bank stocks are a good balance to big technology names because they have lower price-earnings ratios. (The price-earnings ratio, or p/e, is the price of a stock divided by its earnings-per-share).
Segalas said the irony is he's more upbeat about earnings now than he was in the past 18 months. While growth stocks soared, he remained nervous about the impact of crises in Asia and Latin America on earnings.
"What's unique about this quarter is we're more optimistic," Segalas said. "We were always nervous about earnings in general."
Other categories, such as precious metals and cyclical stocks, rebounded in the second quarter because they had been so beaten down. But Segalas is not sure they can maintain that level in the third quarter.
Segalas said the only bogeyman that could spoil the party for growth stocks is inflation.
"If inflation comes back, which I don't expect, then we're in trouble," Segalas said. Cyclical stocks will do better with pricing in rising inflation, while the p/es of growth stocks will get hit.
Another manager of a large growth fund thinks that investors shouldn't be concerned about changing their portfolios to chase the latest Q2 winners. David Corkins, manager of the $5 billion Janus Growth and Income Fund, said he has found success by focusing on the fundamentals of a company.
"I don't pay a whole lot of attention to whether a stock is a large cap growth or value," Corkins said. "What I'm looking for is an excellent management team, a good business, and a company whose earnings will beat what Wall Street thinks."
The Janus Growth and Income Fund was up 4.09 percent in the second quarter and has earned 19.59 percent year to date as of Thursday, Morningstar said. (The well-known Janus Twenty Fund wasn't so lucky in the second quarter. It lost 4.25 percent, but is up 21.2 percent year to date).
Corkins' strategy means that even though he owns big stakes in high-fliers like America Online (AOL), Microsoft and Cisco, he also owns Enron (ENE), a natural gas and oil producer, and Citigroup.
"I don't just buy what's going up," Corkins said. "I look at Enron because of good fundamentals … I think it will do well regardless of which way oil moves."
Investors who try to adjust to the latest winners will find they never catch up, Corkins said.
"You're always running faster and faster to catch up, and you're always late to the game," Corkins said.
Are funds really Y2K OK? While fund companies say they are prepared for the millennium, a new analysis by Value Line Inc. sounds a little more cautious.
The review, by analyst Kirsten Hudson, said that there are three things that shareholders should worry about: Whether fund companies are Y2K compliant; whether the companies funds invest in are Y2K compliant; and the level of vulnerability of funds and those companies to Y2K-related disruptions.
"Virtually all investments are vulnerable to Y2K-related problems," Hudson wrote.
Utilities, transportation and technology companies are dependent on time-sensitive information processing; while retailers and manufacturers rely on automated systems, she said. They all may face telephone, energy and Internet disruptions, too.
Hudson said investors should carefully read any material they get from their fund companies on Y2K plans. If they haven't gotten any updates, they should contact shareholder services.
"If you have received a statement, examine it for what it doesn't mention as well as what it does mention," she wrote. It may say that your records will be backed up, but it might not mention anything about testing, for example.
Bond funds have been caught in a terrible bear market, but new data suggests that investors are starting to warm up to them again.
Bond funds had inflows of $1.7 billion for the week ending Wednesday, compared with outflows of $500 million in the previous week, according to TrimTabs.com investment research.
Hybrid funds, which invest in stocks and bonds, were also winners this week, TrimTabs.com said. Those funds had inflows of $800 million for the week ending Wednesday, compared with $400 million in the previous week.
Meanwhile, equity fund inflows fell almost in half this week, TrimTabs said. Those funds had inflows of $4.2 billion for the week ending Wednesday, compared with $7.2 billion in the previous week.
Finally, here are a few winners for the week in Lipper Analytical Services' growth funds category. The funds invest in stocks that are expected to deliver faster long-term earnings growth.
At the top of the list is Nevis Fund, up 8.47 percent for the week July 1 to Thursday and 133.43 percent year to date as of Thursday; followed by American Heritage Growth Fund, up 7.14 percent this week and 25 percent year to date; and Millennium Growth Fund, up 5.75 percent for the week and up 26.57 percent year to date.
At the other end of the spectrum, the biggest loser of the week was IAI Value Fund, off 15.09 percent this weekand down 1.67 percent year to date; followed by Longleaf Partners Fund, down 3.30 percent this week but up 17.67 percent year to date, and Amsouth Select Equity Fund, premier shares, off 2.93 percent this week but up 2.43 percent year to date.
-- Staff writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds, you can contact her at cnnfn.interact@turner.com
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