Once stunningly successful, oldest Berger funds have fallen on tough times

By knowing when to sell as well as when to buy, William M.B. Berger made a fortune running the mutual funds that bear his name.

Perhaps no decision was better timed than his last: to sell Berger Associates, which runs the three Berger funds, to Kansas City Southern Industries one year ago.


The $47 million sale, announced last May and completed in October, coincided with a shift in market sentiment away from the kind of stocks that Mr. Berger prizes -- those of small companies with rapidly rising earnings.

Instead, the market has rewarded investors who buy larger companies and who adhere to the value style of investing, which prefers low valuations to earnings growth.


Anyone who bought shares in the Berger 100 and 101 funds about the time Mr. Berger was taking his leave has been disappointed. Although stock funds were generally lackluster last year, they have come roaring back in 1995, leaving the two oldest Berger funds in the dust.

"I have serious concerns about the Berger funds," said Larry Chin, associate editor of the No-Load Fund Analyst, an industry newsletter. "Their peers have done much better, and the assets have grown rapidly, altering the character of the funds."

The flagship Berger 100 is up 3.9 percent in the last 12 months, far shy of the 11.4 percent gain recorded by the average growth fund. Berger 101, which invests in growth stocks and in dividend- and interest-paying securities is up 3.1 percent in the last year, less than the average 13.4 percent gain recorded by its peers.

The sole standout has been the Berger Small Company Growth fund, started in December 1993, which has a 17.2 percent return over the last 12 months, putting it near the top among small-company funds. So far in 1995, though, it too has been a laggard.

While small-cap stocks will eventually come back into favor, consistent with the cyclical nature of Wall Street, several factors continue to weigh on the Berger funds.

Roughly one-third of their money comes from discount brokerage programs, like Schwab One Source accounts, which are designed to make it easy for investors to switch fund families quickly.

That portion, considered high by industry executives, leaves the Berger funds vulnerable to a wave of selling if investors panic in a falling market. Suggesting customer dissatisfaction even in this bull market, money has steadily left the Berger 100 fund for several months, according to AMG Data Services, of Arcata, Calif., which tracks fund cash flows.

Also, Rodney L. Linafelter, the chief investment officer and manager of the 100 and 101 funds, has yet to produce the spectacular returns of his predecessor.


He was tutored for four years under Mr. Berger, who remains chairman of the board and an investor in the Berger funds.

Finally, although the funds emphasized the stability provided by a large corporate parent at the time of their sale to Kansas City Southern, the benevolent parent is now distancing itself from Berger.

Kansas City Southern, a railroad and financial services company, announced last month that it would soon sell most of Berger along with DST Systems, which processes transactions for mutual funds, banks and insurers.

In their best years, the Berger funds were stunning. In 1991, Berger 100 gained 88.8 percent, making it the best performer among all stock funds tracked by Morningstar Inc., the fund researchers in Chicago. And in 1993, the fund earned 21.2 percent. Berger 101 also racked up sharp gains, of 61 percent in 1991 and 23.5 percent in 1993.

Assets topped $2 billion last year in the Berger 100, whose name reflects its original goal of $100 million in assets. Similarly, Berger 101 climbed from $7 million in 1991 to $368 million by the end of last year.

But when things were bad, they were horrid for Berger investors. In 1988, 1990, 1992 and 1994 both funds underperformed their peers, usually tumbling to the bottom quartile of funds. Berger 100 and 101 are near the bottom of their peer groups so far.


"That is the nature of the beast," observed Mr. Berger in an interview last week. "We buy growth stocks because at their best they far outperform what value stocks can do during their brief periods of glitter."

The weak showing by Berger 100 is all the more surprising because of the fund's heavy investment in technology stocks, one of this year's hottest industry groups.

The sector makes up about 32 percent of the portfolio, Mr. Linafelter said, with consumer staples -- namely health care, another good performer in the last few quarters -- accounting for 22 percent.

"But there's been a real dichotomy in the portfolio," Mr. Linafelter explained. "About half of our companies have done really well, but week after week, something in the bottom half of the portfolio chips away at the performance of the winners."

One characteristic that has hurt the Berger funds this year is relatively low turnover. About two-thirds of the stocks are replaced each year. By comparison, Fidelity Growth, a slightly larger fund with a similar objective, turns over its holdings at a rate of about 150 percent a year.

Since Mr. Berger abandoned an active role in the stock picking last year, the size of the companies in the Berger 100 fund has grown, too -- by more than 50 percent, according to Morningstar.


Whether current investors will keep the faith through all the changes at the Berger funds is far from certain.

Already, there's some evidence against it. According to AMG, the net outflow from the Berger 100 fund grew to more than $12 million last week, using a four-week moving average.