They say predicting the future is a fool's errand, so let's give it a whirl.
It's particularly intriguing to look ahead to next year because the best we can say about 2001 is that it's over. Thanks to a sagging economy, wilting corporate profits and September's attacks, stocks are about to
trail bonds for the second-straight year, finishing their worst two-year stretch in almost 30 years. Now let's look at three things I think will happen next year and three things I'd like to see happen that are, regrettably, less plausible.
1. Battered tech, growth and high-yield funds revive.
down more than 60% from its peak last year, tech and tech-heavy growth funds have been rocked. That said, fund managers and fund watchers say these losses, low interest rates and the prospect of an economic recovery halfway through next year pave the way for a comeback that
started with the Nasdaq's bottom on Sept. 21.
As for high-yield funds, which have staggered for three years, junk-bond specialists such as Janus'
Sandy Rufenacht and value managers such as Legg Mason's
Bill Miller say the buckling telecom shops that weighed on the sector are mostly washed out, laying the groundwork for big gains.
2. Fewer funds and fewer fund companies.
The potent combination of steep losses, a glut of funds launched during the Nasdaq bubble and shrinking inflows has
motivated many fund companies to merge away or liquidate struggling and unprofitable funds. Because about half of the 3,200 U.S. stock funds out there have less than $80 million in assets, which is a break-even point for many stock funds, this is likely to continue.
In addition to rationalizing their offerings, some smaller fund shops will be willing to consider partnering with bigger competitors that offer more stability and economies of scale. Recent examples from the second half of this year were small-cap value boutique
funds unit, and small but high-profile
, manager of the
Brandywine fund, becoming part of the sprawling
Affiliated Managers Group
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3. Prudence stays chic.
Record billions gushed into stock funds, mostly tech and tech-stuffed growth fund last year, just in time for the mercurial sector and those funds to collapse. After a bout of
statement shock each quarter, many fund investors have taken steps to ratchet down their portfolios' risk. We've seen rising sales through advisers and a slew of fund companies
scrambling to focus on that channel, implying that many do-it-yourselfers are paying for advice.
Rising cash flows to bond funds and tech-light value funds imply a more diversified approach than we saw over the past few years -- though a pessimist might say that's simply investors chasing performance. Finally, with job cuts looming and stock prices swooning, investors started keeping their money in money market funds and bank accounts -- finally building emergency cash stashes that seemed wrongheaded in the heady days of 1999.
Though the next bubble -- whenever it comes -- will probably wipe the past year's lessons away, it's happily hard to see investors being stricken with hubris anytime soon.
Now let's check out three developments that would be entirely welcome, if not entirely likely.
1. Improved disclosure of funds' holdings and fund managers' past performance.
Some funds' portfolio information on fund-screening sites often dates back to shareholder reports released months earlier, making it impossible for investors to know where their money is being invested. Fund firms should be required to disclose each fund's complete holdings on their Web sites, or at least be required to send the information to fund trackers such as Lipper and Morningstar quarterly.
2001 Review: The Year in Funds
Top '01 Stock Fund Managers: Ritchie Freeman, Joel Tillinghast
Top '01 Foreign Stock Fund Managers: Jean-Marie Eveillard, Charles de Vaulx
Top '01 Bond Fund Managers: Ken Leech and His Supporting Cast
Large firms have routinely said this would allow rogue traders to front-run their trades, but this argument is thin at best, given that several firms, including giant
, already report their holdings on a similar schedule via their Web sites. More frequent disclosure would help investors make more-informed decisions.
Another gripe is that fund managers' bios typically list where they went to school and their past employers, but not what funds they've run in the past and how those funds performed. Before institutional investors hand over their cash to a fund manager, they should know where he or she will invest it and how they've performed in the past. Main Street fund investors deserve the same treatment.
2. Active policing of funds with misleading names.
Regulators now require funds' holdings to roughly match up with their names, but sources say it's not clear how actively funds will be monitored. Over the past year we've shown you Net funds that
own stocks like
, tech funds that
own few tech stocks, financial sector funds that own tech stocks, bond funds that
own stocks, and growth and income funds that
pay no income. Let's hope some enterprising G-man is looking at these funds and licking his chops.
3. A fix for the 401(k) mess.
It's often said that 401(k)s and other tax-deferred corporate retirement plans are the most valuable players in an investor's portfolio. They lower participants' taxable income today and also offer tax-deferred growth until investors withdraw money from their accounts. But these plans can have big problems that might be tough to fix.
For one, many companies match employees' contributions with company stock and then require them to hold those shares for several years. This can be disastrous when a company's stock falls through the floor, a point illustrated by the sudden collapse of energy trader
, which left many employees with no job and a decimated nest egg.
Another problem is that participants manage their accounts but often have little investment experience, making dreary old pension funds seem kind of cool again. After the past two years' losses and Enron's collapse, legislators and regulators are scrambling to limit the percentage of company stock in these plans and raise the level of advice available to participants. Industry lawyers say that if history is any guide, these efforts won't get far. Wouldn't it be nice if they did?
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.