| Sargent & Lundy Savings Investment Plan |
| THE RISK OF MOMENTUM FUNDS |
| The following excerpts are from an article in the Wednesday,
July 15, 1998 "Chicago Tribune". The opinions of the author,
Charles A. Jaffe, may or may not reflect those of the SIP Committee. The
article refers to two of the plan's three funds that make of the Aggressive
Growth Fund: John Hancock's Special Equities Fund and the PBHG Growth Fund.
When John Hancock gave one-time star manager Michael DeCarlo the boot recently, it showed just how far the mighty momentum players have fallen, and served notice to investors. DeCarlo had run Hancock's Special Equities fund, and had become a legitimate management superstar in the early 1990s, using a highly stylized system to pick investments. In broad terms, it was the same kind of system that made a number of managers famous, among them PBHG Growth's Gary Pilgrim and Garrett Van Wagoner of the Van Wagoner funds. And then, after a long run with unprecedented results, the market turned on these managers, their funds, and shareholders. While Hancock Special Equities has returned 18.65 percent on average over the last 10 years, its year-to-date gain of less than 1 percent cost DeCarlo his job. In fact, many of the momentum stars of the early and mid-90s look like bums today. These fallen angels have taken their beatings and can't deny the numbers; all they can do is point optimistically to a track record of coming back from defeats. But in their decline lies a fundamental lesson for all investors about understanding what you buy, and avoiding risks you can't stomach. After all, these funds looked as if they couldn't lose, right up to the point where they did lose. Momentum investing can be loosely defined as buying stocks of companies with continuous growth in earnings, stock price or both. The idea is to identify stocks on the rise and to ride them until the growth begins to wane. These days, virtually every mutual fund has holdings with momentum behind them. It's hard not to, when so much of the stock market is riding the crest of success during the '90s. But true momentum funds distinguish themselves because they typically go feast or famine. Witness PBHG Growth, one of the top stock funds from 1990 through 1996 and now in the dumps. Annualized average returns are nearly 19 percent over the last 10 years, but just 6 percent year-to-date, well below its peers. That fund is similar to others in that it's fabulous when times are good and horrible when things go wrong. As such, it proves a point: Momentum funds should not be treated like other growth funds. Their white-knuckle ride makes them more like sector funds, an octane booster for a portfolio. "Momentum funds definitely aren't for everybody," says John Rekenthaler, director of research at Morningstar Inc. "You buy them when they have great short- and long-term numbers. But only a minority of their investors will make money going forward - no matter how much the fund earns over time - because they can't handle the manic-depressive cycle when these funds are down." The trouble is that many investors treat momentum like an investment objective, rather than a style. Morningstar, for example, lumps momentum funds in with other growth funds. While technically correct, momentum and plain-vanilla growth are not the same; a fund in the technology sector also could be a growth fund, for example, but its style of tech-only pushes it into a separate arena. Momentum, too, should be a category of its own. "The managers of these funds know that they will someday go over the cliff," says Janet Brown, editor of the No-load Fund*X newsletter. "They will climb back out, but the style requires that you have a long enough time horizon. You either have to buy it and forget about it, or actively trade it, and most people can't trade funds and make money at it." Pilgrim, speaking at the Morningstar Mutual Fund Conference last month in Chicago, noted that "customers always hire us at the wrong time and they get out three-quarters of the way through the cycle...You have to be educated about style cycles, or forget stylized funds and be in something else." That's not great news for people out there who wanted a core growth fund but got a momentum fund. They now have either ridden out the doldrums (hoping for the rebound Pilgrim and his peers believe is around the corner) or bailed out dissatisfied. Typically, experts suggest keeping no more than 20 percent of an investment portfolio in sector funds. Stylized, cyclical issues, including momentum funds, fall into that realm, too. Under certain economic conditions, these funds will deliver big, but there is generally an element of timing involved that should discourage all but the most hearty of souls. Says Pilgrim: "For people who have the stomach for it and condition themselves for the downturns, these funds are a tremendous opportunity. For people who don't use these funds properly, who could see themselves coming in on the highs and out on the lows, it's a mistake." |
This page updated on 7/24/98