So, you've got some money to put to work and are looking for the right mutual fund. If cash flows into funds during Januarys past are any indication, chances are you'll head for the top names of last year.
Get ready to see the pundits do some finger-wagging -- remember, past performance doesn't guarantee future results.
That might seem like a welcome warning, especially now, when triple-digit returns are almost ho-hum among tech funds, and a repeat of the sizzling 200%, 300%, nearly 500% delivered by 1999's chart-toppers seems downright impossible.
But don't let that stop you from looking -- and, in some cases, touching.
There's no need to automatically assume that sizzling performance one year means you'll get burned the next. Or even if technology and telecom names drop from favor, that these tech-taut funds won't do well against their peers -- in my measure, the most important yardstick to use when choosing a fund.
Chart-topping just doesn't send a definitive signal one way or the other. You can neither assume that a No. 1 fund will be a powerful performer over the long haul nor say that yesterday's leader will be tomorrow's laggard. And neither way can you assume a fund has a place in your portfolio.
I asked the good folks at
to go back to 1994 and give me the returns for the top funds for each subsequent year.
Some of them have become plain stinkers.
American Heritage, 1997's No. 1, plummeted to almost dead last among all funds in 1998 and 1999. Fund manager Heiko Theime's big bet on one stock just didn't pan out.
Others were held hostage by their sector. The Japanese funds that peppered 1994's charts saw their share of minus signs when their region went way out of favor. A chart-topper in 1997,
Lexington Troika Dialog Russia, followed a 67% gain with an 83% loss to rank dead last the next year, 5,952 out of 5,952 funds.
But does all this mean they are bad funds? Not per se if you want to take a stake in those regions. The only way to really find out about a fund is to dig more deeply: Check its performance relative to that of similar funds over time, and find out its manager's tenure and style.
Take 1994's top fund,
Seligman Communications & Information, which sunk to the bottom 10% of its peers last year despite returning 75%. Manager Paul Wick has a penchant for small-cap tech stocks and hasn't jumped on the dot-com bandwagon, and both these things hurt him last year. But the fund may still have the kind of tech exposure a less-risky investor is looking for.
Ultimately, the fact that a fund leads a year's performance list doesn't mean much more than that it did well in a particular 12-month period. I see some standouts and red flags among 1999's funds. Let me comment on the top five (with the exception of
Van Wagoner Emerging Growth, which is no longer open to new investors).
MAS Small Cap Growth is led by Arden Armstrong, an experienced manager with an outstanding record. Just the opposite, a lack of experience at the top, worries me about No. 5
Nevis fund -- a high-octane, high-tech offering that got big boosts last year from some hot IPOs. This is the first time the managers have run a retail fund.
And No. 1-performing
Nicholas-Applegate Global Technology, with its stunning near-500% return, shows some wrinkles, too: namely, the departure of two of its managers last summer, as well as the fact that most of its gains were garnered when the fund was much smaller and more nimble.
As for 1999's second-best performer,
Warburg Pincus Japan Small Company, again, this is a regional bet with all the inherent risks. And the fund has definitely seen both ends of the charts, ranking in the bottom third of its category in '96 and '97.
I prefer to check out other lists when looking for my funds. Look for the top performers by average annualized five-year return. This at least ensures you have a track record to judge in a variety of environments, and it's no surprise that many star managers, such as Bill Miller of
Legg Mason Value, David Alger of
Alger Capital Appreciation and Kevin Landis of
Firsthand Technology Value, are in their ranks.
You might also want to check the top performers in their categories for the past 10 years. Here are a few, thanks to Morningstar.
Yes, sorry, you have to do your homework. But don't look at last year's eye-popping returns and steer clear for fear that this can never happen again, or that some of these funds won't outperform the following year. Simply selecting or shunning the top 10 list is no shortcut.
Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at