What a difference a quarter makes.
The first quarter wasn't great by any stretch of the imagination, but it was up 0.3% as measured by the Standard & Poor's 500 index. And the positive return helped improve 12-month performance of the 100 largest mutual funds most used in defined contribution plans.
Fifty-three of the 100 mutual funds in the Pensions & Investments' equity universe had positive returns for the year ended March 31. In contrast, only seven funds were in the black for the one-year period ended Dec. 31.
The year that was 2001 not only hurt returns, but also hit assets and thus affected the P&I universe of the 100 largest equity funds. Among equity funds bumped off the list were the Janus Growth & Income, MFS Research, AIM Charter, and T. Rowe Price Growth & Income funds. (Each January, P&I asks mutual fund managers to list their funds by defined contribution assets, then compiles the universes of most-used equity and fixed-income funds. Those universes then are used as the base for the quarterly performance rankings.)
There were 13 newcomers, including two that made a sudden impact on the performance charts: the T. Rowe Price Small-Cap Stock Fund, managed by Greg McCrickard, and the Fidelity Value Fund, managed by Rich Fentin. The funds finished third and fourth on the P&I list of the top-performing equity funds most used by defined contribution plans with returns of 21.7% and 18.6%, respectively. The small-cap fund was one of three T. Rowe Price funds among the top 10 performers for the year ended March 31.
Fidelity No. 1
Once again, the top performer was the Fidelity Low-Priced Stock Fund, managed by Joel Tillinghast, which returned 30.4% for the year - the fourth consecutive quarter the fund has been on top.
The Neuberger Berman Genesis Fund, managed by Judith Vale and Robert D'Alelio, placed second with 22.2%.
While the top two funds are small-cap value equity funds, the third place T. Rowe Price fund takes a slightly different approach. It's a small-cap blend fund that always has had more of a value bias, said Mr. McCrickard, but also includes a good mix of growth-at-a-reasonable-price stocks.
"We look at the market as a whole and let the market tell us where the values are" rather than seek out a certain percentage of growth and value stocks, Mr. McCrickard said. The strategy has enabled him to reduce the volatility of returns in the portfolio, he added.
He attributed outperformance over the past 12 months to good stock selection, particularly in the health care, technology and industrial sectors. One big contributor was Harman International Industries Inc., a company that makes stereo speakers. Harman, the portfolio's largest holding, was up 93% in the 12 months.
MKS Instruments Inc., a semiconductor firm, was another strong performer, returning 85% in the 12 months. A big winner in the health-care sector was Henry Schein Inc., a dental products distributor.
Following the Sept. 11 terrorist attacks, Mr. McCrickard picked up some good values in the technology space, such as Belden Inc., a company that manufactures wire, cable and fiber optics for the electronics and communications market. Mr. McCrickard bought the stock in September when it was down to $16 a share; as of mid-April it was around $25 a share.
Mr. Fentin, manager of the fourth-place Fidelity Value Fund, saw a lot of opportunities in the market as long as you avoided places like technology, telecommunications, and megacap stocks, such as the largest 50 stocks in the S&P 500. Mr. Fentin said he is a "dyed-in-the-wool value investor" who somewhere along the line became known as a "deep value" manager even though his strategy never changed. Nonetheless, his strategy put him in the right part of the market during the past 12 months.
"Given that I run a midcap value fund, I was at least on the bus," said Mr. Fentin, since small- and midcap were better than large-cap in 2001, and value was better than growth. Throw in good stock-picking and an accommodating Federal Reserve Board and it adds up to strong performance.
The gains in the portfolio were broad-based, said Mr. Fentin. Performance came from a variety of places like Harsco Corp. an industrial company, which returned 65%. Regis Corp., a chain of hair-styling salons, was up 90% for the year while John H. Harland Co., a check printer, was up 55%.
But growth funds weren't out of the running.
Two T. Rowe Price growth funds placed fifth and sixth on the charts. The New Horizons fund returned 15.2% and the Mid Cap Growth, 14.75%.
The Baron Asset Fund, managed by Ronald Baron, placed seventh on the list of the top funds for the year ended March 31 with 14.2%.
Baron Asset also is a growth fund. Morty Shaja, Baron president, said the strategy is to buy good growth companies at a reasonable price. "We try to execute value-oriented purchase and sell disciplines in investing in these great growth companies," he said. And once a stock joins the portfolio, it usually stays awhile as the Baron Asset fund buys stocks with the intention of holding them for five years or more. "It's traditional investing. It's not trading, it's investing. That's what we do," he said.
The roller-coaster ride of the past 12 months helped Baron test the business models of the companies and the convictions of its bottom-up research. In September, Mr. Shaja said the portfolio management team looked closely at travel-related stocks in the portfolio, which were hurt by the terrorist attacks. They had to decide if the slowdown in travel was a short-lived situation or if U.S. travel had changed permanently. "We decided to stay the course and take advantage of the volatility to buy more and increase positions," he said. They added positions to Vail Resorts Inc., Sun International Hotels Ltd. and Four Seasons Hotels Inc., all of which are back up from September lows.
Another big winner was ChoicePoint Inc., the largest position in the portfolio. The stock of ChoicePoint, a firm that collects information on individuals, has taken off in the last six months as Americans have become more security conscious, he said.
Fixed income slows
Rounding out the top 10 equity funds for the year were the team-managed Dodge & Cox Stock Fund, which returned 13.6%; the Vanguard Explorer Fund, up 13.59%; and the American Mutual Fund, up 10.7%.
While equity fund performance has picked up since September, fixed-income performance has slowed a bit in 2002 as evidenced in the returns of the largest fixed-income funds in the P&I universe.
The top return for the year ended March 31 was earned by the team-managed Dodge & Cox Income Fund, up 7.3%. The same fund returned 10.3% for the year ended Dec. 31. Some 40 fixed-income funds had better returns at year-end than the top performing fund through March 31, according to P&I data.
Occupying the second and fourth slots in the fixed-income ranking were two funds managed by Pacific Investment Management Co., PIMCO Total Return and Total Return II. Total Return was up 7.2% for the year, while Total Return II managed 6.9%.
Outperformance in the 12 months stems from being in the right sector in the right bonds at the right time, said William Gross, portfolio manager of Total Return and Total Return II, and chief investment officer at PIMCO. "We were long in our duration until October, we were light in our corporates until the beginning of 2002, and we stayed the course believing in mortgages the entire 12 months," he said.
Despite the bond market slowdown, Mr. Gross said there still are places to make money and avoid losing money. He will continue to focus on high-quality, yield-enhancing strategies rather than interest rate exposure. "We will retain an overweight in mortgages, and add attractively priced investment-grade corporates - especially credits with strong balance sheets that can withstand the disappointments that come during recovery," he added.
Going forward, he believes the downturn is over and the recovery will be moderate. "The U.S. will lead the rebound with average growth over the next several quarters of 3% to 3.5%, as a sharp inventory liquidation winds down and provides growth through addition by the elimination of subtraction," he said.
With growth constrained and inflation benign, he doesn't see the bond market biased in any direction. In this setting, limited potential for capital gains from interest rate strategies called for an emphasis on high-quality, income-generating bonds, with the best values found in the United States.
Sandwiched between the PIMCO funds in third place was the Morgan Stanley U.S. Core Fixed Income Fund, which returned 7%.
Rounding out the top five is the LM Western Asset Core Portfolio, which returned 6.7%.