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Mutual Funds To Avoid If You Don't Want Roller Coaster Returns
s the market shows extended volatility, and the pundits continually mention the "C" word (Correction, as in Market Correction), investors should be alert for mutual funds that may offer too bumpy a ride.
In my April column ("Bull Market or Bear, Know Your Exposure") we reviewed three common tests for evaluating mutual funds: standard deviation, beta and alpha. Standard deviation is an effective test to measure just how volatile the returns of a particular mutual fund have been over a given period of time. Recall that funds with higher standard deviations indicate historically greater volatility.
Standard deviation, moreover, allows investors to gauge just how bumpy a mutual fund's ride will be in the future. Statistically, 68% of the time, a mutual fund's total return will not vary by more than plus or minus the standard deviation. Further, 95% of the time, a mutual fund's return will not vary by more than plus or minus two times the standard deviation.
To identify the mutual funds that have had, and statistically will have, the greatest volatility in total returns, we utilized our proprietary research database, with data current as of 3/31/98. We limited the search to mutual funds that invest in stocks of U.S. companies. We searched for those funds that have had the highest standard deviations over the last 3 year, 5 year and 10 year periods (weighted equally). Finally, we eliminated mutual funds that invest primarily in the stocks of small companies (whether or not the name of the fund suggests otherwise). Each mutual fund identified has experienced a standard deviation greater than or equal to 20.
We identified 21 mutual funds. They are:
Alger Small Capitalization B
American Century 20th Century Ultra Inv
American Century 20th Century Vista Inv
Bull & Bear Special Equities
CGM Capital Development
Davis Growth Opportunity B
Dean Witter Developing Growth B
Evergreen Aggressive Growth A
Evergreen Small Company Growth B
Fortis Advant Capital Appreciation A
MFS Emerging Growth B
PBHG Growth
Pioneer Growth A
Putnam OTC & Emerging Growth A
Smith Barney Aggressive Growth A
Smith Barney Special Equities B
Spectra
State Street Research Capital S
Steadman Security Trust
Stein Roe Capital Opportunity
Van Kampen American Capital Emerging Growth A
For example, let's review the significantly disparate returns of some of the better known mutual funds. Dean Witter Developing Growth B gained 47.69% in 1995 but lost 4.61% in 1994. Stein Roe Capital Opportunity was flat in 1994 (earning 0%), gained 50.72% in 1995, then gained only 6.15% in 1997. Van Kampen American Capital Emerging Growth A gained 44.63% in 1995 but lost7.13% in 1994. Finally, Smith Barney Special Equities B lost 6.28% in 1994, gained 62.25% in 1995, lost 6.38% in 1996 and lost 6.38% in 1997.
Many of these funds have experienced superior performance over time. But standard deviation allows us to see how bumpy the road has been for them. These roller coaster mutual funds are suitable only for investors who know, and can bear the risk, of their volatile returns.
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
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