The best-performing equity mutual funds in the periods ended March 31 shared three characteristics: a love of large-cap stocks, a passion for the technology sector and active management.
The 25 best performers among the stock funds most popular with defined contribution plan investors all beat the 18.6% return of the Standard & Poor's 500 index for the 12 months.
The top 25 performers for the year included no less than 23 large-cap funds; six of those were funds with growth-value blended approaches, but 19 had a strong growth biases, judged by their Morningstar Inc. style boxes. All of the top 25 were actively managed.
The hands-down winner was the large-cap growth Janus 20 Fund, which returned a mindboggling 79.9%.
It has topped the performance rankings of Pensions & Investments' list of funds most used by defined contribution plans for several quarters. Its sister fund, the Janus Fund, took fourth place in the year with a 35.1% return.
The Fidelity Aggressive Growth Fund came in second with a 48.8% return and the T. Rowe Price Science & Technology Fund returned 39.2%. A fund new to P&I's annual performance ranking of the top 50 equity fund performers from among the 100 funds most popular with defined contribution plans, was the Prudential Jennison Growth Fund/A, which was sixth for the year ended March 31 with 32.8%.
The funds at the top of P&I's one-year equity performance charts almost perfectly reflect a stock market that is the narrowest it has been in the history of the Russell 3000 index, said Paul Greenwood, senior research analyst at Frank Russell Co., Tacoma, Wash. Only 27% of the stocks in the Russell 3000 beat its 13.5% return for the one-year period; at least 50% of stocks are expected to beat the index in a given time period, Mr. Greenwood said. Large-cap stock dominance has been complete, with the exception of small-cap Internet stocks in which managers play "a game of chicken, the last one off gets killed," he said.
The past five years have been dominated by large-cap and growth stocks, Mr. Greenwood said, and while the cycle and its length aren't unprecedented, "it always seems longer when you've been underperforming so long."
Mr. Greenwood was referring to the portfolio managers who manage something other than large-cap, growth stock funds and who have been sorely tempted to "capitulate and violate their own style and valuation disciplines to get even a 5% or 10% exposure to Internet stocks. Even that small proportion would really help a fund's performance. A lot of managers who have underperformed for the last four or five years feel they can't keep on betting against large-cap stocks. A lot are wrestling with the tension between adhering to their investment disciplines and their own short-term business prospects."
Actively managed equity funds did not fare as well in the five years ended March 31. There was one index fund among the top 10 best equity fund performers and eight among the top 25 funds.
The nine actively managed funds in the top 10 ranking all beat the S&P 500's annualized 26.3% return for the period.
The high number of index on the list of the 25 best performing funds over five years explains the presence of 12 large-cap growth-value blend funds on the list. There were 11 growth funds and two value funds within the top 25. Twenty two funds had large-cap biases.
The Janus Twenty Fund also was No. 1 for the five-year period, with a 36.1% return, followed by the Fidelity Dividend Growth Fund, with 28.8%. A fund new to the 50 top performers in the five-year period was the MFS Massachusetts Investors Trust Growth Fund, which returned 28.3%. The T. Rowe Price Science & Technology Fund moved up to fourth place from sixth, with a 27.9% return. In fifth was the Vanguard U.S. Growth Fund with a 27.8% return.
P&I based its quarterly ranking of the 50 best-performing funds on a universe of the 100 equity and 100 fixed-income mutual funds with the most defined contribution plan assets under management as of Dec. 31, according to data provided annually by fund companies.
The Fidelity Magellan Fund remained by far the most popular fund in the United States with defined contribution plan participants, who had invested $52.8 billion in the fund as of Dec. 31. The fund's assets under management for defined contribution plans increased 44.8% from the previous year. Magellan's performance for the year ended March 31 -- 25.6% -- put it at No. 13 for the period. For the five years Magellan was 39th, with a 22.6% return.
The Fidelity Growth & Income Portfolio, with $25.3 billion under management for defined contribution plans, continued to hold second place, with a roughly $5 billion lead over the third place Vanguard 500 Index Fund, which had $20.6 billion. The Fidelity Contrafund moved to No. 4 from No. 5, with $20.3 billion managed for retirement plan investors, nudging sister fund, Fidelity Equity Income with $16.4 billion, to fifth place.
Two more Fidelity funds jumped into the list of 10 funds most popular with defined contribution plan investors, giving the firm seven of the top slots. The Fidelity Advisor Growth Opportunities Fund, with $10.6 billion in retirement plan assets, came in eighth (defined contribution plan assets were not reported for this fund in 1998) and the Fidelity Blue Chip Growth Fund moved up to ninth from 15 last year with $9.9 billion.
Stellar outperformance of individual funds does not seem to be determining criteria for defined contribution plan investors.
Of the 25 funds most used by 401(k) plan investors, for example, only eight were among the 25 best-performers for the one year and seven for the five years ended March 31. In fact, of the 25 largest funds didn't make it into the ranks of the 50 best-performing equity funds for the one-year period and seven missed the mark over five years.
While the best performing fund for the one- and five-year periods, the Janus Twenty Fund, ranked only 37th with $2.5 billion under management for defined contribution plan investors, its popularity is ballooning. The fund ranked 69th in the 1998 ranking, with just $807 million managed for retirement plan investors. At the end of April, the fund was closed to new investors except new employees of existing defined contribution plans and accounts of financial advisers.
Among bond funds, the PIMCO Total Return Fund, was the favorite among plan participants, who had $2.8 billion invested as of Dec. 31. (PIMCO this year combined the assets in various share classes of the fund for reporting purposes, which it did not in prior years.) The PIMCO Total Return Fund's institutional share class return for the one year ended March 31 -- 7.6% -- earned it the No. 1 rank in the category; it was 21st with an 8.4% return for the five-year period.
The Fidelity Intermediate Bond Fund was second with $2.3 billion, in terms of assets managed for defined contribution plan investors. It had been No. 1 last year, before consolidation of the assets of the PIMCO Total Return Fund. The Vanguard Total Bond Market Index Fund was third with $2 billion, up from fifth the prior year. The Capital Research/Bond Fund of America was fourth (down from No. 2) with $2 billion. The T. Rowe Price Spectrum Income Fund, new to the top 100 asset ranking, jumped to fifth with $1.2 billion.
For the year ended March 31, the Payden & Rygel Total Return Fund, newly reported for the 1999 ranking, popped into second place, with a 7.2% return, followed by the Fidelity Spartan Investment Grade Bond Fund, 6.8%. In fourth was the Fidelity Bond Index Fund, with 6.7%, up from ninth in the previous quarter. The Vanguard Total Bond Market Fund was fifth, up from 10, with 6.6%.
For the five years ended March 31, high-yield funds continued to dominate the top 25 performers, a trend that persisted throughout 1998. Thirteen of the top 25 were high-yield funds.
The top performing bond fund for the five years ended March 31 remained the Fidelity High Income Fund with a 12.1% return. In second place was a new fund, the MAS High-Yield Institutional Fund, 11%. The Federated High Income Fund was third with 10.1%. up from fourth. Another new fund, the MainStay High Yield Corporate Bond Fund, was fourth with 10.1%.