MUTUAL FUND managers should hang their heads in shame.
Last year, only 17 percent of them beat the Standard & Poor's 500 stock index, which tracks the performance of 500 large-company stocks. Worse, less than 5 percent of the fund managers beat the index over the past five years that ended in August 1998, according to a recent study by Morningstar FundInvestor, a publication owned by the Chicago-based mutual fund ratings company.
No matter if the managers invested in small-company stocks, real estate investment trusts, bonds or gold, they were whipped when stacked up against the S&P; 500.
That's why investors have been pouring billions into index funds, specifically the ones that mirror the S&P; 500. Last year, they pumped $46 billion into index funds, up nearly 40 percent from the $33 billion they put into these funds in the previous year, and nearly double what they invested in 1996.
Over the past five years, the number of index funds has nearly tripled, to 268 funds with $240 billion in assets, compared with 94 index funds with $24.8 billion, according to Wiesenberger, a Rockville-based mutual fund tracking service.
Although there are about 40 different kinds of index funds, about 70 percent of the money is flooding into S&P; 500 funds, because the index has been sizzling over the past four years. And investors can't ignore a track record of 20-percent gains.
"In the past six years, the index funds have been going through the roof," said Stephanie M. Kendall, senior mutual fund analyst at Rockville-based Wiesenberger, which follows the industry.
The granddaddy of all index funds is the Vanguard 500 Index Fund, which had $79 billion in assets at the end of February, and is gaining on Fidelity's Magellan Fund, the nation's largest with nearly $86 billion in assets.
Started in August 1976, the Vanguard 500 hasn't had a losing year since 1990. Last year, it returned 28.61 percent, and for the past five years it has returned an average 24.7 percent.
"These are amazing numbers," said Peter DiTeresa, associate editor at Morningstar FundInvestor. "It looks great over the long haul. It has been extremely tough to beat."
Index funds are designed to match the performance of the market as a whole. Some mirror bond indexes, other track precious metals, small-company stocks and utilities.
The popularity of funds that mirror the S&P; 500 troubles some experts, who say investors are throwing too much money into funds that buy the most expensive stocks -- Microsoft, Cisco, Dell, Coke and Wal-Mart. Those stocks keep going up, reinforcing the notion that they'll never fall, and have given investors the perception that the entire stock market is roaring ahead, they say.
But last year, very few stocks did well, with the average stock losing 20 percent of its value. Small stocks took the biggest beating, losing 24 percent of their value, while the biggest stocks gained 26 percent.
"The 50 stocks at the top of the S&P; 500 were in a bull market, a crazy bull market, and so many of the other stocks were in the bear market," said Avi Nachmany, an analyst at New York-based Strategic Insight.
Robert F. Mewshaw, president of Van Sant & Mewshaw Inc., a Lutherville-based investment adviser, uses index funds, including the Standard & Poor's Growth Index, which mirrors the 250 fastest-growing stocks in the index, and the Standard & Poor's Value Index, which tracks 250 companies that have stock prices that don't reflect the true worth of the company.
He thinks investors have gotten carried away with the S&P; 500 index funds, and says its only a matter of time before the inflated prices of the blue-chip stocks fall.
"People are saying, 'Gee, the market keeps going up, it will continue to go up,' " he said. "They are focusing on this particular asset class, and it is very dangerous thing to do. There is no perception of risk. When this thing declines, people at first won't believe it, then greed will be replaced by fear."
Pub Date: 3/14/99