Fund Managers Pour Cash
Into Stocks, Despite Doubts
By ROBERT MCGOUGH
and KAREN DAMATO
Staff Reporters of THE
WALL STREET
JOURNAL
Robert Marcin, who knows a thing or two about investing, is getting
scared. Not only has he cut back on his personal stockholdings; he is even
planning to plow some money into options whose value will rise if, as he
fears, a bear market cuts stock prices in half.
But that's in his own portfolio. At the office, where he manages the
$2.3 billion MAS Funds Value Portfolio, he says he is "bending"
his usual investment rules to pump up the mutual fund's stockholdings.
He is slower to sell issues that have risen sharply and hurries to invest
new money.
Why is Mr. Marcin managing his mutual fund like a bull while hunkering
down like a bear at home? Because bullishness is what mutual-fund investors
demand these days. As the longest bull market in history roars on, lifting
the Dow Jones Industrial Average to a record 6560.91 Friday, fund investors
are quick to penalize managers who get cold feet. Even keeping just 10%
of the fund's assets in cash has hurt Mr. Marcin's performance in recent
years. Investors expect funds to stay fully invested, "and that's
what we're trying to do," he says.
A Flood of Money
The pressure on mutual-fund managers to be fully invested has never
been greater. This year, a record $208 billion has cascaded into stock
funds, easily swamping the previous record of $129.6 billion in 1993. And
managers are putting the money to work as fast as they can. Despite the
torrent of money, funds' holdings of "cash" -- that is, safe,
short-term instruments such as Treasury bills -- have plunged to 6.2% of
assets, the lowest level since 1977 and down from almost 13% at one point
in 1990.
In the past, when the managers became worried about high stock prices,
they would sell the issues that looked overpriced and raise cash. This
bull market, however, has turned into a juggernaut that sweeps aside all
caution.
As fund managers watch the market's continuing rise, the shadow of Jeffrey
Vinik looms over them. The former manager of Magellan Fund, the huge fund
run by FMR Corp.'s Fidelity Investments, became worried about high stock
prices a year ago and sought safety in cash and bonds. Magellan's resulting
dismal performance has cost it an estimated $5 billion or more in net redemptions.
And whether Mr. Vinik jumped or was pushed, he no longer holds mutual-fundom's
most prestigious job. His departure from Magellan, which had $53.3 billion
in assets at the end of October, amounted to "a message sent throughout
the entire fund industry," says Don Phillips, president of Morningstar
Inc., a Chicago fund-analysis firm.
Other well-regarded managers also have suffered after turning cautious
too soon. Investors withdrew almost half the assets in the once-hot Crabbe
Huson Special Fund after its manager, Jim Crabbe, made a disastrous bet
last year that technology stocks would tumble.
Investors are intoxicated with heady stock-market gains, says Robert
Markman of Markman MultiFunds: "The best metaphor is it's 11:30 at
a frat party and everybody is drunk." This fall, Mr. Markman took
the risk of telling everyone to sober up, and his three funds have backed
away from the market in the past few months. The result? The inflow of
money is drying up, and irate investors have labeled him "a brain-dead
bear," he says.
Uncomfortable Times
So, fund managers are finding themselves in an unhappy position.
"Am I worried about the market? Yeah, I'm worried about the market,"
says George Vanderheiden, the 51-year-old elder statesman of Fidelity fund
managers. "Am I fully invested? Yeah. My investors want me to be."
Mr. Vanderheiden says this year's stock market is "the mirror image"
of that of 1987: Rather than crashing down, as it did in October 1987,
it has crashed upward this year. And rather than stepping in to provide
assurance that the nation's financial system would survive, as he did in
1987, Federal Reserve Chairman Alan Greenspan is warning investors about
"irrational exuberance" in financial markets, Mr. Vanderheiden
notes.
Mr. Vanderheiden says it is so difficult to find new stocks to buy at
prices he likes that the three stock funds he manages own $3 billion of
a single issue. Citing Fidelity policy, he won't identify the stock, though
official filings suggest it is Philip
Morris Cos. The situation is less than ideal, he concedes: "Many
fund managers would like to manage a fund $3 billion in size. I have $3
billion in one stock. If I found more companies like that, I would fill
my portfolio with them."
Another apprehensive veteran is G. Kenneth Heebner, whose $615 million
CGM Capital Development Fund has given the best return to stock-fund investors
over the past 15 years. Hunched over a computer screen, he has been scrutinizing
dozens of stock charts from the last two stock-market debacles: the slow,
painful slide in 1973-74 and the short, violent one in 1987.
"Can I construct a portfolio that's bulletproof against a significant
market decline?" the 56-year-old Mr. Heebner asks. "I've not
been able to do it yet, and I'm not going to do it now."
The charts tell him, he says, to avoid high-priced, "hypergrowth"
stocks, which tend to get slaughtered during a crash. That means shunning
such hot, high-tech names as Cisco Systems Inc., Ascend Communications
Inc. and Cascade Communications Corp. "What I find very worrisome
is that the mutual-fund industry has invested very heavily in this sector,"
he says. He bluntly warns investors in funds with large holdings in such
high-priced stocks to consider selling.
The Days of Greed
In the market's counterpoint of fear and greed, Eric Ryback, a fund
manager and president of Lindner Funds group, believes that greed has hit
its zenith. "People are pouring their life savings into mutual funds,"
he marvels, but he expects that someday, with the inevitable bear market,
fear will take over again. He thinks the next bear market, like the 1973-74
bruiser, could "take a generation of people and turn them completely
negative on investing in the market."
Certainly fund investors are growing more frenetic, aided and abetted
by the reams of mutual-fund statistics and advice published in newspapers
and magazines and on the Internet. According to Vanguard Group Chairman
John C. Bogle, today's investors hold on to stock funds for only 2 1/2
years on average, down from about 12 1/2 years 25 years ago.
Even fund managers with impressive track records get short shrift from
impatient investors. Nancy Dimsdale, a mother, artist and "self-taught
investor" in the San Diego area, says she is "disappointed in
two funds I had great hopes for, Bramwell Growth Fund and Artisan Small
Cap Fund." Both have managers with strong long-term records, but both
have lagged well behind the Standard & Poor's 500 Index this year.
"I'm the kind of person who likes to see dramatic results," she
says. So, rather than putting more money into those funds, she has been
doing her own research and buying stocks directly.
Many investors grown accustomed to six years of steady gains expect
the huge returns to keep right on coming. "I anticipate that before
the end of the decade, the Dow Jones [Industrial Average] will get close
to 10,000," says John Slivinsky, a systems analyst at a big New York-area
bank. "I want to take advantage of that." So after Jan. 1, he
is planning to switch money out of Evergreen Balanced Fund, which invests
in stocks and bonds, and into a far-riskier small-company stock fund.
A Changed Game
Such attitudes drive fund managers to exasperation. Lindner's Mr. Ryback,
44, says that when he entered the business in 1982, "you were measured
on what you did over the span of two or three years." This year, his
funds have seen "people investing sums of money and then taking it
out a week later," based on a week's performance. "That's ridiculous,"
he fumes.
At Neuberger & Berman Guardian Fund, one investor wrote a letter
inquiring whether the fund managers went to college, recalls Kent Simons,
a co-manager. The fund, which has outperformed the S&P 500 in the past
five, 10, 15 and 20 years, has lagged behind the index by about six percentage
points this year. Mr. Simons says the letter added, "And if they did
go to college, where did they go? Because I don't want any of my kids to
go there."
All this creates a pressure-cooker atmosphere for fund managers. Lagging
behind your competitors in an up market seems to be a greater sin than
losing a lot of money in a down market. It's "a macho thing at times,"
says Douglas Pratt, a former mutual-fund manager at Invesco Funds Group
Inc., who now manages private assets at Millennium Asset Management, of
Kirkland, Wash. If managers hesitate about jumping on the market bandwagon,
"People say, "You're too much of a wimp. Step up to the plate
and buy this Internet stock. Aren't you a player? If you're not, maybe
you'll underperform, God forbid." "
So what's a fund manager to do?
Mr. Heebner says his study of prior crashes shows that cheaper stocks,
especially those in boring basic industries such as steel, chemicals and
paper, bounce back while racy growth stocks stay depressed. He also thinks
real-estate investment trusts may do well.
At Fidelity, where Mr. Vanderheiden's Destiny I fund ranks No. 4 over
15 years to Mr. Heebner's No. 1 ranking, the policy is for funds to be
fully invested. But Mr. Vanderheiden may seem to be fudging on that policy
by putting a highly unusual 15% of his stock funds' assets in bonds. Not
true, he says: Bonds are just "another financial vehicle," not
an attempt to time the market.
Too Awful to Watch
Fund managers who are fully invested are suffering vertigo. One December
day, when the market was "getting destroyed," Ed Keely, 30, who
runs the $900 million Founders Growth Fund, forced himself to turn off
the stock-screening software on his computer so he wouldn't see the scary
declines in his stocks. "The fright factor is always there,"
Mr. Keely says. He repeats to himself the lecture he got from a more-experienced
fund manager: "Remember, Ed, you are not your stocks. Your stocks
may be getting killed, they may be going down, but you are not."
The ads that Founders Asset Management Inc. runs for Mr. Keely's fund
set a high standard: "Whether you invest in microchips or potato chips,
I just want my fund to grow," a muscled bike rider says. Mr. Keely
knows his current posture could look foolish a few years from now if the
market gets nailed by a prolonged downturn. He concedes, "In hindsight
we will say, oh yes, the market was expensive."
A colleague down the hall, Brian Kelly, 45, is anxious because his $500
million Founders Blue Chip Fund is not fully invested. It has 22% of its
assets in cash and short-term bonds. His caution has penalized his performance,
but he takes some comfort in his diverse career: "I've been a prosecuting
attorney, I've been a corporate attorney, I was a registered Washington
lobbyist, I'm a superb bridge player... . I can do lots of other things."
Sometime in the future, Mr. Kelly says, investors are going to look
back and wonder why fund managers owned the stocks they did at these prices.
His answer: "The managers were under incredible pressure to be participating
with the market on the way up." Pressure from fund-company management
or investors or the press or consultants? "All of the above."
Fidelity's Mr. Vanderheiden recalls that in April 1971, the fund industry
had its first month in a long time when investors were taking money out
of mutual funds. "Nobody thought about it much," he recalls.
But then investors took out cash the next month, and the next. "We
had months of net redemptions for 11 years. It just kind of snuck up on
you. Nobody predicted it."
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