The mutual funds most popular with defined contribution plans kept their fans happy in the second quarter, with returns that were lower overall than the first quarter, but still crowd pleasing.
Almost half of the 50 best-performing equity funds in that group beat or matched the 30.2% return of the Standard & Poor's 500 index for the year ended June 30, according to Pensions & Investments' ranking of second-quarter performance.
Active managers appear to be strengthening their hold over the top of the charts, as only 20 active funds beat or matched the S&P 500's 48% return in P&I's previous ranking for the year ended March 31.
For the year ended June 30, P&I's ranking of the 50 best performing 401(k) plan funds started at 47.2% and ended at 26.3%. By contrast, for the year ended March 31, the No. 1 equity fund, INVESCO Dynamics, returned 57.1%. The No. 50 fund for the period, Scudder Growth & Income, returned 42.9%.
Index returns were much higher in the first quarter, with the S&P 500 returning 48% for the year ended March 31, vs. 30.2% for the year ended June 30. The S&P 400 Mid-Cap index returned 49.1% for the year ended March 31 and 27.1% for the year ended June 30. The Russell 2000 returned 42% for the year ended March 31 and 16.5% as of June 30.
The one-year performance of the top fund -- the Janus Twenty Fund -- was a dazzling 47.2% as of June 30, bringing it up from 10th for the 12 months. The second-place fund for the second quarter in a row, the Putnam Investors/A Fund, returned 38.9%. INVESCO Dynamics returned 38.3% to make third place. The Fidelity Emerging Growth Fund made a dramatic leap up to fourth place with a 35.8% return for the year ended June 30, up from No. 43 last quarter. The American Century Income & Growth Fund moved to fifth position with 35.6%, down one notch from fourth place in P&I's previous performance ranking.
P&I's second-quarter special report ranks the 50 best-performing equity and 50 best-performing bond funds from among the 100 mutual funds in each asset class most used by defined contribution plans (P&I, March 22). The performance of the 25 international equity funds most used by defined contribution plans also is included in this report.
The number of growth funds among the top 25 equity funds increased to 13 in the current ranking, up from 11 last quarter, based on their style category classification by Morningstar Inc., Chicago. Of those, seven were large-cap growth funds and six were midcap growth funds. Also among the top 25 equity funds were five large-cap value funds and seven large-cap blend funds. The median return for the Callan Large Cap-Value Style universe was 21.2% for the year ended June 30.
Three Putnam funds that usually are among the top 10 or 20 best-performing equity funds in P&I's quarterly surveys were knocked down from their typical perches. All three are classified as midcap growth funds, according to their Morningstar categories, and are managed by Putnam Investments, Boston.
The Putnam OTC and Emerging Growth Fund dropped to No. 51 for the year ended June 30, returning 25.5%, from fifth the previous quarter. For the five years ended June 30, it moved down to 36th with a 20.8% return from 12th the previous quarter. (Returns for periods of longer than 12 months are annualized.)
The Putnam New Opportunities/A Fund fell to 14th with a 32.8% return for the year ended June 30, down from third in the previous ranking. The fund was still ranked in the top 10 funds for the five years ended June 30, although it moved down to sixth place with a 24% return, from third for the five-year period ended March 31.
The Putnam Voyager/A Fund also showed some slippage, moving down to 17th with a 32.1% return for the year ended June 30, from sixth place for the 12 months ended March 31. For the five years, the fund moved to 27th place with a 21.8% return, after holding 17th place in P&I's last performance ranking.
Putnam officials declined to comment on the funds' performance.
Another fund very popular with defined contribution plan investors has suffered severe performance setbacks. The Merrill Lynch Growth/A Fund, had been a perennial strong performer for defined contribution plan investors for at least the past 18 months. For the year ended Dec. 31, 1996, the fund was No. 1, with a 29.7% return and No. 4 for the five years ended Dec. 31, 1996, with a 21.3%. A year later, the fund was not among the 50 best performers for the one-year period, but was second for the five years.
The fund began to slip earlier this year, possibly coinciding with the illness and death in March of its long-time manager, Stephen C. Johnes, who founded the fund 1987. Again, the fund did not appear among the top 50 best performers for the year ended March 31 and plummeted to 37th for the five years with a 21.2% return. For the year ended June 30, the fund's performance was the very worst of the 100 most-used equity funds by defined contribution plans, returning -0.19%. For the five years ended June 30, the fund ranked at 82 with a 17.2% return.
Merrill Lynch officials were unavailable for comment by press time regarding the fund's performance.
The manager of the best-performing equity fund for the year ended June 30, Scott W. Schoelzel, took over the management of the Janus Twenty Fund Aug. 1, 1997. In the ensuing 12 months, Mr. Schoelzel said he dramatically altered the fund's profile from the way it was run by its previous manager, Tom Marsico.
Mr. Schoelzel said he has 100% of his personal cash assets in the $10.3 billion Janus Twenty Fund. At the age of 39, he runs the fund the same way a defined contribution plan investor probably invests: using a time horizon of at least 20 years, a simple investment philosophy, a concentrated portfolio of stocks, and a common sense approach. He said he also views the investment process as a journey, not of three or four weeks, but of eight or 10 years.
Mr. Schoelzel said he tends to own companies providing a very good brand name -- such as General Electric Co., Pfizer Inc., Microsoft Corp., America Online, Merrill Lynch & Co., Home Depot, BankAmerica Corp., Cisco Systems, WorldCom Inc.and Citicorp -- although the brand name is less important that the pricing of the product or service and its long-term growth prospects.
The portfolio holds up to 32 stocks, but Mr. Schoelzel said he is very diversified by sector and product. Although the holdings in the portfolio tend to be large-cap in size, he also looks for midcap companies poised for strong growth that will push them into the realm of large-cap stocks. One such stock might be Intuit, the maker of Quicken personal finance software.
According to Callan Associates Inc., San Francisco, the equity style median returns for the five years ended June 30 were 22% for the large cap-growth universe and 20.6% for the large cap-value universe, compared to the 23.1% return of the S&P 500.
But the top funds in P&I's five-year ranking defied conventional wisdom -- 16 of the top-performing 25 equity funds were large-cap blend and value funds, according to Morningstar's category classifications. There were four large-cap growth funds, two midcap growth funds, one midcap blend fund, one small-cap growth fund and one sector fund. Six of the top 25 were passive funds. Just 10 funds beat or matched the S&P 500's performance, compared with 14 funds for the five years ended March 31.
Returns for the five years ended June 30 ranged from 26.9% for the top fund -- the Fidelity Dividend Growth Fund -- to 20.1% for No. 50, the STI Classic Value Stock Trust. The range of top 50 returns was very similar to that for the five years ended March 31. Similarly, index returns were fairly similar from last quarter to this quarter, with the S&P 500 returning 23% for the five years ended June 30 vs. 22.3% as of March 31. The S&P Mid-Cap 400 returned 18.5% for the five years ended June 30 and 19.5% as of March 31. The Russell 200 returned 16% for the five years ended June 30 and 17.7 as of March 31.
The top fund, Fidelity Dividend Growth Fund, reached its fifth anniversary in April 1998 and went straight to the top of the five-year performance charts. The Morgan Stanley Institutional Equity Growth Fund/A remained in second place with a 26.1% return. The T. Rowe Price Blue Chip Growth Fund popped up to third place from 37th last quarter with 24.9%. The Vanguard/PRIMECAP Fundmoved to fourth place from fifth last quarter with a 24.5% return. The Vanguard U.S. Growth Fund jumped up to fifth place from 29th with a 24.1% return.
Charles Mangum, manager of the $7.5 billion Fidelity Dividend Growth Fund, gave credit to the three managers before him -- Abby Johnson, Fergus Shiel and Steve Wymer -- for the five-year performance of the fund. Mr. Mangum has managed the fund since January 1997. The fund also moved up to seventh place with a 34.6% return as of June 30 in the one-year ranking, up from 13th.
Mr. Mangum said his is a very deliberate style, based on the belief that earnings drive stock prices. "I'm looking for companies that can grow earnings over time. These kind of companies consistently outperform the market," he said.
Mr. Mangum also said he does not try to time the market The fund is always fully invested, which Mr. Mangum said has helped performance in the past 18 months.
Fidelity managers are not permitted to talk about individual stocks, said Mr. Mangum, but there are six investment buckets in the fund. Three core buckets are the stable growth companies, such as advertising, pharmaceuticals, healthcare, retail, food and consumer nondurables; financial sector companies; and technology stocks. Much of the fund's assets are invested in the core buckets.
The three noncore buckets hold energy, utilities and cyclical stocks where Mr. Mangum said he looks for more opportunistic bets. "Long-term, you wouldn't expect this fund to own a lot of cyclicals or energy stocks, but this is where we may find some opportunities."
Mr. Mangum said investors in the fund should not expect a lot of change in the future in the fund's management. "I'm not trying to hit home runs with regard to returns. And that's what I think shareholders in the fund want. They aren't invested in the Dividend Growth Fund for earth-shattering returns. They want the steady pace."
In the fixed-income area, there was very little movement among the top funds for the five years ended June 30 and high-yield bond funds continued their dominance. Of the top 25 bond funds, 13 were high-yield, six were intermediate-term corporate funds, two were long-term corporate funds, three were multiduration and sector and one was an intermediate-term government fund, according to Morningstar's category classification.
The Fidelity Spartan High-Income Fund remained very firmly in the top spot, with a 13.4% return for the five years ended June 30, followed again in second place by the PIMCO High-Yield Institutional Bond Fund with 11.8%. The Franklin AGE High-Income Institutional Fund moved up to third place with a 10.7% return from fourth place last quarter. The Federated High-Income Bond/A Fund moved up to fourth place with a 10.6% return from fifth last quarter. The Kemper High-Yield/A Fund was fifth at 10.5%, up one spot from sixth.
High-yield funds also monopolized the one-year fixed-income rankings, with 11 of the top 25 funds investing in the asset class. Eight of the top 25 were intermediate-term corporate bond funds, four were long-term corporate bond funds, one was an intermediate-term government fund and one was multisector and duration. Two of the top 25 bond funds were passive.
The Fidelity Spartan High-Income Fund also remained the top fund for the year ended June 30 with a 16.63% return. Fidelity Capital and Income followed for the second time in second place with a 16.55% return
The Vanguard Fixed-Income Long-term Corporate Bond Fund moved up to third place from fourth last quarter with a 16.4% return. The Janus Flexible Income Fund jumped way up the charts to fourth with a 13.1% return, up from 12th last quarter. In fifth place was the T. Rowe Price High-Yield Fund; last quarter it was third.
Another notable climber was the Norwest Advantage Diversified Bond Fund that climbed to seventh from 19 last quarter with a one-year return of 12.6%. Notable dropouts from the one-year top 25 ranking was the Franklin AGE High-Income Institutional Fund with a 10.4% return, which dropped the fund to 30 from 11th last quarter. The Merrill Lynch Corporate High-Income Fund plummeted down to 58th for the one-year ended June 30 from 16th as of March 31.