Funds Tracking S&P; 500 May Be Heading For A Fall

There are plenty of reasons to own a fund that tracks the Standard & Poor’s 500-stock index, and they may have seemed particularly compelling in recent years.

Just buy the market, proponents argue, and after 10 years you will beat 70 percent of managed mutual funds and have fewer fund distributions to cope with. How can you go wrong?

You can go wrong if your index fund pays too much for the stocks, argues Jack Bowers, who edits Fidelity Monitor, an independent newsletter in Rocklin, Calif, that follows Fidelity funds.

And the S&P 500 may be too expensive, says Bowers, a Spokane native. He notes the theory that a stock is overpriced if its price-to-earnings ratio is a higher number than its percentage of long-term earnings growth. The S&P 500’s price-to-earnings ratio is more than 19, well above its 10-year earnings growth of about 9 percent.

There are, in fact, many expensive stocks in the index’s top 25, including Coca-Cola, Microsoft and Merck. And the huge valuations are a result of too much money chasing the index stocks lately, he wrote in the July issue of his newsletter.

The premiums are not justified, he said, and at some point, the market will recognize that many mid-cap, small-cap and foreign companies offer better values.

Bowers concludes that the S&P 500 could be on the verge of a long dry spell, compared with other market segments.

If you must index, he says, use a mix of mid-cap, small-cap and overseas index funds from Vanguard, an inexpensive indexer.

Boards seat more outsiders

A bit of good news for those who worry about whether corporate directors are really looking after shareholders’ interests: Korn/Ferry International, the executive search and consulting firm, says there’s a marked drop in the number of insiders, like company executives, sitting on the average board.

A study of proxy statements from 800 U.S. corporations found that the average board had 11 members in 1995, compared with 12 in 1994 and 14 in 1985, Korn/Ferry said. The number of insiders - people like the chief executive officer and other executives - was only two in 1995, compared with three in 1994 and up to five in the early 1970s.

Shareholder advocates generally argue that a board with more outsiders is more demanding of the company’s management, which may put its own interests ahead of shareholders’.

The typical director works 163 hours per year for each board position he or she holds, attending eight board meetings and three to five committee meetings. The average director was paid $42,205 in 1995, up 6 percent from 1994. That brings average board pay to $259 per hour.

$100 can start a portfolio

What can a novice investor do with just $100? Start a two-stock portfolio without paying brokerage commissions. Charles Carlson, an expert on the 129 companies that now allow investors to buy stock directly (he calls these “no-load” stocks), recommends Johnson Controls Inc. (414-228-2363), which makes auto seats and climate-control systems, and Wisconsin Energy Corp. (1-800-558-9663), a utility with a 5.5 percent dividend. Each allows investors to make initial stock purchases of just $50. Noload stocks with $250 minimums include: Exxon (1-800-252-1800), Sony (1-800-711-6475) and Wal-Mart (1-800-438-6278).

Carlson, who edits the No-Load Stock Insider (219-852-3230), also publishes a directory of such stocks, plus hundreds more that allow you to take dividends in stock rather than cash.