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Long-term results of mutual funds show erosion


New York -- If there is any consensus about how the little guy should cope with the investment world's complexities, it is this: by purchasing a diversified portfolio of securities -- read mutual funds -- selected after careful consideration of long-term results.

A long-term look at the numbers, however, suggests those results have been misleading because the best numbers are becoming increasingly bad. Cumulative 10-year results of the top 25 mutual funds tracked by Lipper Analytical Services have been steadily declining since 1984 -- and have plunged this year.

Begin with the largest mutual fund of all, Fidelity's Magellan Fund, which spent 1983 through 1990 at the very top of the charts. With $15.7 billion in assets, the fund has more money deposited in its safekeeping than all but the largest banks. The man orchestrating its investments, Peter Lynch, retired last year at age 46, lauded as a guru who could divine the tastes and trends of America and make even the Wall Street-illiterate rich in the process.

Supporting this claim was a remarkable 10-year record. Vanguard, Merrill Lynch and others had their own outstanding stock pickers whose results were trumpeted in numerous ads. Great long-term results became as close to gospel as anything in the investment world. It was impossible for even casual readers of financial publications to miss a simple fact: Had they handed over their piddling savings to these funds, they would have become rich.

Which, by and large, they didn't. And that is the core of this story.

Most of these funds racked up their best years in the mid- to late 1970s and early 1980s, when the funds themselves were tiny (because they were unknown) and the market was low (because it was despised).

When both these situations reversed, the results did, too. As is often the case in the investment world, by the time those results became visible, the success had already begun to taper off (see table).

Without some very good fortune, it will taper off even more. In 1975 and 1980, the stock market recorded its biggest yearly gains since the Roaring '20s. Not coincidentally, each time one of those years has slipped off the 10-year tallies, long-term results for top mutual funds have dropped dramatically.

That is particularly true for Fidelity's Magellan. Its 10-year cumulative appreciation fell from a high of 1,784 percent at the end of 1984 (the last year 1975 numbers were included) to 1,124 at the end of 1989 (the last year 1980 results were included) to 588 percent at the end of 1990.

The current decade, unlike the last, began with a sigh. The benchmark Standard & Poor's 500 fell 3 percent, as opposed to rising 32.45 percent 10 years before. Fidelity's Magellan, managed by a successor to Mr. Lynch, fell 4.5 percent. Perhaps Mr. Lynch could have done better. But it is one thing to do spectacularly well during an unusually good year, and quite another to do equally well amid a broad decline.

During the first half of this year, Magellan rose a whopping 23.35 percent. But for its overall 10-year record to stay even, it will need to hold those gains and to do even better during the next two years.

Magellan's problems are extreme, but not unique. Other big funds, such as Vanguard's Windsor and Merrill Lynch's Pacific A, have seen their results erode. As is typical -- in everything from baseball averages to the size of children from different families -- the exceptional appears to be regressing back to the norm. The results of the best fund managers have drawn closer to the results of the Dow Jones industrial average.

"It's not that these guys were so much brighter or are now so much dumber," said A. Michael Lipper, president of Lipper Analytical Services. "The environment changed."

the next quarterly ranking, Magellan will almost certainly be replaced as the top 10-year fund by a Fidelity fund that invests only in health care. Health-care companies have recorded spectacular profits in the 1980s, but already those profits have drawn anger from consumers and the government. Health care is likely to see compression of earnings. Despite the recent slippage, Mr. Lipper noted, the average equity from the mid-1970s to the late 1980s still appreciated at about 13 percent a year -- far above the 30-year average of about 9 percent. "The real question is whether the overall appreciation rate will have to go below the norm for a sustained period to bring the averages back in line," he said.

Mutual's growth lags over time

Average 10-year cumulative return for top 25 mutual funds.

Figures in mutual funds column show how much a given investment -- for example, $1,000 -- would have appreciated in the decade precding the year shown. The right column shows the comparative performance on the Dow Jones Industrial Average.

.. ..Mutual funds.. .. ..DJIA

1981.. .. ..365%.. .. .. .-2%

1982.. .. ..399%.. .. .. ..3%

1983.. .. ..750%.. .. .. .48%

1984.. .. 1,025%.. .. .. .97%

1985.. .. ..857%.. .. .. .81%

1986.. .. ..736%.. .. .. .89%

1987.. .. ..692%.. .. .. 133%

1988.. .. ..617%.. .. .. 169%

1989.. .. ..587%.. .. .. 293%

1990.. .. ..387%.. .. .. 329%

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