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September 20, 1999 01:00 AM

SHAKEUPS: DIVERSITY IS KEY TO STAYING ATOP MUTUAL FUND RANKINGS; JANUS IN RIGHT PLACE AT RIGHT TIME, MERRILL WASN'T

Linda Sakelaris
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    Young guns like Janus Capital Corp. have shoved their way into the elite corps of large mutual fund players in the last five years by pushing aside big toughs like Merrill Lynch & Co. Inc.

    Janus' secret is no secret -- the right place (growth funds) at the right time.

    Merrill's mistake was standing on the wrong side of the rotation.

    "We recognize the need to broaden the product line and we are attempting to do that," said Merrill spokeswoman Christine Walton.

    A comparison of current and historical rankings among the mutual funds most used by defined contribution plans bears out what the industry's megafirms have proclaimed as gospel: A firm that offers a complete range of investment styles will always have one fund on top, despite the ups and downs of the financial markets.

    For example, Fidelity Investments, The Vanguard Group of Investment Cos. and T. Rowe Price Associates Inc. were high fliers in mid-1994 with international stocks, according to data compiled by Pensions & Investments that year.

    Five years later, international stocks were out of favor, but not Fidelity, Vanguard and T. Rowe Price. The three topped the one-and five-year performance lists again in 1999, but this time with growth funds.

    "No one can predict market leadership, so that's why you have a broad menu of funds," said Drew Lawton, senior vice president of Fidelity Institutional Retirement Services Co., Boston.

    "And plan sponsors have to offer as much diversity as possible," he said, in case the market rotates away from a particular category.

    Fund families that have fallen from the rankings in the last five years are those that have relied heavily on one style, such as Merrill and Templeton World Wide Inc.

    New York-based Merrill is a value-oriented investment management shop -- a remnant, sources say, of longtime leader Arthur Zeikel, who retired last year.

    While many growth funds were booming during the last five years, Merrill had only three such vehicles. And one, the midcap blend Merrill Growth Fund, has been plagued by dismal performance, down 0.5% year to date as of July 31. A new portfolio manager was appointed in January.

    About $1 billion alone leaked from the Merrill fund family in July -- twice the outflows of July 1998 -- and $8 billion in net outflows has been recorded year to date, according to Financial Research Corp., Boston.

    There is no question the Merrill has been hurt by the market's strong preference for growth stocks, said Merrill's Ms. Walton. Merrill is the 10th most used fund family for defined contribution plans.

    Three Merrill funds made P&I's one- and five-year performance rankings in 1994. The strongest --the Global Allocation fund -- ranked sixth among its peers for five years as of June 30, 1994. The Merrill Lynch Growth fund was seventh.

    This year, no Merrill equity fund made either the one- or five-year ranking.

    "We are bringing on additional growth fund managers and intend to offer more sector funds as well."

    Merrill is expected to launch a large-cap growth fund soon, due to the recent high-profile hire of portfolio manager James McCall, who formerly ran the PBHG Large Cap 20 fund for Pilgrim Baxter & Associates Ltd., Wayne, Pa.

    Raising the bar

    Time and a large-cap market boom have raised the bar for equity funds. The highest five-year equity return, international or domestic, in 1994 was 20.2%, posted by the Fidelity Blue Chip Growth Fund.

    The same fund, with a 24.4% five-year return as of June 30, only placed 44th out of 50.

    Fueled by well-performing growth funds, firms like Janus and Massachusetts Financial Services have shoved their way into the top rankings, mingling with Fidelity, T. Rowe and Vanguard. The strongest funds this year were the Janus Twenty, with a five-year return of 36.7% as of June 30, and the T. Rowe Science & Technology fund, with a one-year return of 60.1% as of June 30.

    "The way to get business and keep it is performance," said Martin Beaulieu, president of MFS Retirement Services Inc., Boston. For the five years ended June 30, the MFS Mass. Investors Growth fund ranked fourth among equity mutual funds most used by defined contribution plans.

    No MFS equity funds made the 1994 rankings, although several bond funds were present.

    International results

    International equity funds were the superstars in 1994. Topping the list of one-year returns that year: Vanguard Growth Fund with 25.5%; T. Rowe Price's International Fund with a 22.1% return; Harbor International with 21.2%; Cap Research EuroPacific Growth with 20.8%; Templeton Foreign with 20.7%; Fidelity Overseas with 20.2%; Templeton World with 18.9%; and Templeton Growth with 17.3.

    But this year, international equity funds returned less than 20%, in general, and were knocked off P&I's charts.

    The investment focus of Fort Lauderdale, Fla.-based Templeton is international value, which has been doubly out of favor. The Morgan Stanley Capital International Europe Australasia Far East index was up only 4% year to date as of June 30, up 9.1% for three years, 8.5% for five years and 6.9% for 10 years.

    The EAFE is a general benchmark for international stock portfolios.

    Although value stocks experienced a brief rebound this year, the Russell 3000 value index was only up 13.5% for 1998, compared with 28.6% for the Standard & Poor's 500 stock index.

    "It's been difficult in international investing for the last five years," said Denman Zirkle, Templeton's executive vice president of institutional marketing. Templeton World Wide belongs to the Franklin Templeton Group, which is owned by Franklin Resources Inc., San Mateo, Calif.

    The Templeton Foreign Fund ranked 13 of 50 on the five-year list in 1994. And, while it outperformed the EAFE index for the five years ended June 30, 1999, it seriously lagged even the 50th ranked equity fund.

    DC interest

    Pension funds have broadened their DC offerings in the last five years, said Mark Olsen, investment consultant at Defined Contribution Advisors Inc., Minneapolis.

    "Five years ago, there might have been five or six funds in the core line-up, but now there's eight or nine. There have been style additions, such as large-cap growth and value, as well as the addition of S&P 500 funds," Mr. Olsen said.

    The amount of DC assets a fund must hold to even make the top 100 has also changed dramatically in the past five years.

    Five years ago, Fidelity Magellan topped the list with $12.3 billion in defined contribution assets. In P&I's latest rankings, it had

    $52.8 billion. By contrast, $131 million was enough to put Putnam Health Sciences in the 100th spot five years ago; today, Franklin Balance Sheet Investment needed $590 million to be ranked 100th.

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