Washington Mutual Thrives as Quiet Behemoth

The publicity-shy fund, with $57 billion in assets, emphasizes its strategy over its stock-pickers.
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Quick -- name the biggest actively managed mutual fund.

No prize for answering that one correctly. Topping $90 billion in assets, the now-closed

Fidelity

(FMAGX) - Get Report

Magellan fund has long been

el primo

when it comes to size.

Now, for the real money, tell me which fund takes second place, weighing in at $57 billion.

Harder? Yes, in part because the company that owns

American Funds'

(AWSHX) - Get Report

Washington Mutual Investors doesn't care much if you know about the large value fund. No advertisements, no manager interviews, not even a public-relations flack. You'd think it was trying to hide a bad record.

Not true. In fact, for the trailing three-, five- and 10-year periods, its average annual returns rank it in the top fifth of large value funds, according to

Morningstar

. The same can't be said for Magellan. And how about risk, turnover and tax efficiency? Washington Mutual is better on those scores than its bigger competitor, too.

But you'll never see Washington Mutual spotlight a manager-turned-celebrity like Magellan's famous former stock-picker

Peter Lynch

. Search the prospectus hard enough, and you'll eventually find the names of Washington Mutual's eight managers, known as "portfolio counselors."

But publicity-shy

Capital Research & Management

, which owns American Funds, would rather point to its strategy than its stock-pickers. Counselors keep a very low profile and, unlike many big names these days, don't hop from fund to fund. Most measure their employment histories with Capital Research in decades, not years. "A star will be hot for a year or two, or cold and move on," says Washington Mutual spokesman Chuck Freadhoff, who believes a disciplined stock-picking approach is the key to the fund's success.

Stocks have to meet strict criteria before the eight managers (each of whom controls just one-ninth of the portfolio -- the last ninth is managed by the fund's analysts) can even consider them. Holdings must have paid dividends in nine of the last 10 years, assets to liabilities must be 1.5 to 1. Oh, and no alcohol or tobacco stocks.

Only some 300 stocks make the list, and Washington Mutual, by no means a concentrated fund, owns about half of them, including

Sprint

,

First Union

,

Ameritech

(AIT) - Get Report

,

Bristol-Myers Squibb

(BMY) - Get Report

,

Chase Manhattan

(CMB)

and

Atlantic Richfield

(ARC) - Get Report

.

It's been a successful strategy so far. For the past five years, an average annual return of 25% beats all but 6% of Mutual's peers. Last year, the fund was up 19%, based on the good performance of such top holdings such as

Wells Fargo

(WFC) - Get Report

. In 1997, the fund sported a 33% gain.

Perhaps more telling, though, is that a focus on dividends has helped the fund hold up well during down periods, such as the third quarter of 1998, even though it does not keep a lot of cash on hand. The fund has to be at least 95% invested at all times.

"We are long-term investors," says Freadhoff. "There is a small select list of blue-chip companies and not a lot of swapping around." Sure enough, turnover is just 18%.

But the fund is available only through brokers and financial advisers, and there's no getting around a stiff up-front load.

"One of the advantages of working through financial advisers is you are put into a fund when it's appropriate for you. You stay with it for the long term, much as we view our investments and companies," says Freadhoff.

OK, the hefty sales charge may be well and good for the self-described conservative growth-and-income fund, which is made up primarily of retail shareholders. But what about the investors who have to shell out 5.75% when buying Washington Mutual?

Keep in mind that this is actually a fairly cheap investment if you hold the fund for several years. A 0.62% expense ratio is less than half the average 1.31% expense ratio for large value funds calculated by Morningstar. And Mutual gets a gold star in my book for passing along lower expenses to investors as assets grew. (Back in '92, the ratio was 0.74%.)

And grow they did. In the last three years alone, nearly $40 billion poured into the fund. Which, of course, begs the question, can this hippo dance?

Freadhoff insists size has no impact on the fund because it sticks with large-cap names and because, with more than 150 stocks in the portfolio, managers can't take a huge stake in any one holding.

I'm not so convinced. For this go-go growth market, being limited to large stocks has been a plus. But what happens when small-caps get their turn? And Washington Mutual is stumbling a bit so far in 1999. Despite a strong showing from top holding

Bank of America

(BAC) - Get Report

, up 22% this year, the fund slipped into the bottom half of its category, with a 9% return.

Granted, it survived bad years before. In 1994, for example, it was flat, then roared back in '95 to deliver 41%.

But don't expect to hear those numbers from Washington Mutual Investors. Mum's the word for this phantom giant. Still, I'd say its long-term record and stats speak volumes.

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

TSCBrenda@aol.com.