Ask a group of mutual-fund investors to describe the ideal stock fund and the consensus might go something like this: The fund beats the market averages when stock prices are rising, and it lets holders sleep soundly in bear markets by dropping significantly less than the averages.
That’s certainly not as outlandish as, say, wishing for a fund that goes up 20 percent a year, year in and year out.
But does such a wonderful bull-and-bearmarket fund exist?
Only in investors’ dreams, a study of the past decade’s fund performance suggests. Investors can’t expect their funds to be “miracle workers” like that, says John Rekenthaler, editor of Morningstar Mutual Funds. “There isn’t a single one.”
At The Wall Street Journal’s request, researchers at Chicago-based Morningstar Inc. searched their database of diversified U.S. stock funds to find those that beat the broad market in periods of both rising and falling prices from 1985 through 1994.
Thirteen funds - out of a total 350 in business 10 years or more - indeed passed that test. On close examination, though, the results are cold comfort for the many investors who know they’re supposed to buy stocks for strong long-term performance, but who are unnerved when the market tumbles.
‘Time’ the Market
To be that ideal bull-and-bear fund, notes Chicago money manager and newsletter editor Gerald W. Perritt, “you’d have to be in cash when the market goes down and you’d have to be in aggressive stocks when the market is going up.”
But academic studies and reviews of fund performance have long suggested there are few people who are able to successfully and consistently “time” the market like that.
The methodology of the Morningstar analysis was straightforward, albeit a little crude. There was only one period in the past decade - a three-month time frame encompassing the October 1987 crash - that fit the usual bear-market definition of a 15 percent drop. So the definition of bear-market performance was broadened to capture downturns of 10 percent or more, pulling in two periods in 1990.
All performance figures used were total returns that include both price change and distributions (which were assumed to be reinvested) but exclude loads.
To look at bear-market performance, Morningstar simply added up each fund’s total returns for the three down periods. Each fund’s total returns for the bull periods were similarly tallied. For the performance of the broad market, Morningstar used the Vanguard Index 500.
The 13 funds that passed the test of beating the index fund in good times and bad? They are all growth or growth-and-income funds, generally investing in medium-capitalization and large-capitalization stocks. And if not miracle workers, certainly a solid bunch of funds. If investors are seeking diversified stock funds to use as core holdings in their portfolios, says Mr. Rekenthaler, “this would be a good group to pick from.”
Among the standouts: New York Venture Fund and Guardian Park Avenue Fund.
Highest Overall Return The fund that delivered the highest overall return among the 13, Berger 100 Fund, appears to have made the list partly by a fluke. The fund invests in the generally volatile shares of fast-growing companies. Typically, “we swing more than the market in both directions,” says William Berger, chairman of Berger Associates and until recently the manager of Berger 100.
But Berger 100 also sometimes buys put options - essentially bets that the market will fall - when those securities look cheap. And it held a bunch of S&P; 500 puts going into the 1987 crash. That year, in a threemonth period when the Vanguard Index 500 declined 33 percent, Berger 100 was off a more modest 23 percent.
Meanwhile, the two funds that suffered the least in the past decade’s down periods, while still beating the market in up periods, are both somewhat unusual: IAI Regional Fund, managed by Investment Advisers Inc. of Minneapolis, invests at least 80 percent of its portfolio in companies based in eight Midwestern states. Lexington Corporate Leaders Trust Fund generally doesn’t venture beyond the 30 stocks that were in the portfolio when the fund began in 1935.
One strategy, advocated by Mr. Berger and Mr. Perritt, is to stop worrying about bearmarket declines and to focus on the more volatile funds that are likely to deliver the best performance over the long haul.
A classic example are the funds in the Twentieth Century group. Twentieth Century Giftrust Investors had the best 10-year record of all stock funds: a breathtaking cumulative total return of 875 percent. But during the three down periods in the decade, its losses added up to a 92 percent.
Alternatively, investors who can’t tolerate such a down-market drubbing can find funds that have lost noticeably less than the market when times are tough.
Some of the very best bear-market performers among diversified U.S. stock funds have been real dogs when the market is hot. Valley Forge Fund had the best bear-market numbers of the past decade: its losses in the three down periods added up to just 16 percent. It managed an anemic total return of only 106 percent for the whole decade.
Other funds have lost significantly less than the S&P; 500 in bad markets and also beaten the market over the long haul.
One example from the past decade: three Mutual Series funds - Mutual Shares, Mutual Beacon and Mutual Qualified. Those funds’ bear-market declines, ranged from 38 percent to 42 percent - about two-thirds that of the broader market. But the three all beat the market over the 10-year period, with cumulative total returns ranging from 296 percent to 319 percent.