Why fund managers are sad you're not on vacation

Staff Writer
Columbus CEO

NEW YORK (AP) — Your stock-fund manager wishes you'd buy more fun things.

Most mutual funds are failing to keep up with broad market indexes again. It's a trend that's gone on for years, and the most recent struggles for portfolio managers may be due to their preference for companies that sell coffee, make travel reservations and otherwise focus on non-essentials for consumers. These stocks have had some of the year's weakest performances.

That, plus some other trends from around the mutual-fund industry:


Through the end of June, 60 percent of large-cap stock funds fell short of the Standard & Poor's 500 index for one-year returns, according to S&P Dow Jones Indices. The numbers are starker for funds that focus on small-company stocks: Nearly three quarters of small-cap funds -- 73 percent -- failed to keep up with the S&P 600 index, while 58 percent of mid-cap funds underperformed the S&P 400.

It's one of the risks of buying a fund where managers are trying to pick winning stocks in hopes of beating an index: They could pick wrong. And when they stumble, they still charge fees that are higher than for index funds.

So far this year, a mistake has been to focus on companies that sell non-essentials to consumers. They're collectively known as the consumer-discretionary sector, and they have risen 2.3 percent. That's well below the 8.1 percent gain for the S&P 500.

Too bad consumer-discretionary stocks have been among the more popular choices for fund managers this year.

Strategists at Goldman Sachs looked at hundreds of large-cap mutual funds with $1.4 trillion in investments, measuring which stocks are most and least favored by managers. They found that most funds devote a bigger slice of their portfolios to the consumer-discretionary sector than the S&P 500 does.

Priceline Group makes up 0.8 percent of the average large-cap fund's investments, for example. That may not sound like much, but it's double the online travel company's weight in the S&P 500. That means Priceline's performance will have a bigger effect on the average fund than the index, and Priceline has been relatively weak this year, up 1.2 percent. Its stock has struggled since August, hurt by worries about competition and slowing growth.

Casino company Las Vegas Sands makes up 0.3 percent of the average fund's portfolio, versus 0.1 percent of the benchmark, and it has sunk 19.3 percent this year. A pullback in gambling in Macau, which provides much of the company's earnings, hit the stock. Or consider Starbucks, another relative favorite of mutual-fund managers. Its stock is down 2.9 percent this year.

To be sure, mutual-fund managers are prepared to accept short-term drops. But many funds run by stock pickers have struggled to keep up with broad market indexes over the last five years, as well.

In the five years through June 30, 87 percent of large-cap stock funds have had lower returns than the S&P 500. The percentage of small- and mid-cap funds failing to beat their respective index is nearly identical, 88 percent.


While mutual-fund managers are bulking up on consumer-discretionary stocks, Exxon Mobil is getting the opposite reaction. The energy giant makes up just 1.1 percent of the average large-cap fund's portfolio, according to Goldman Sachs. That's less than half its weight in the S&P 500.

Avoiding Exxon Mobil has been a lucrative decision for fund managers this year. Its stock is down 4.1 percent, and the price of oil fell Wednesday to its lowest settlement price since January.

Mutual-fund managers are also skeptical of famed investor Warren Buffett's company. Berkshire Hathaway's weight in the average large-cap mutual fund is less than half its role in the S&P 500. That choice, though, hasn't looked wise in retrospect. The parent of Geico insurance and BNSF railroad has jumped 16.3 percent this year, double the index's gain.

Other stocks that mutual-fund managers are generally avoiding relative to their benchmark include IBM, AT&T and Procter & Gamble.


Investors saving for retirement continue to pile into target-date mutual funds, which topped $600 billion in assets last year.

Target-date funds are built for people who don't want the responsibility or worry of divvying up how their savings are invested. Investors pick a fund that's pegged to the year they plan to retire. When that target date is far off, such funds keep nearly all their assets in stocks. As the planned retirement-year approaches, they'll shift more of their portfolio into bonds and other safer investments.

Savers are increasingly turning to target-date mutual funds that track stock and bond indexes, rather than those that try to pick winning stocks and bonds. Last year, index-based funds made up 33 percent of the target-date retirement fund industry, according to Morningstar. That's up from 10 percent in 2005.