Science-fiction movies invariably have people hopping into cars with autopilot: Press a few buttons and sit back, and the car steers itself to the local spaceport in time for the 7:30 Mars shuttle.In real life, prototypes of autopilot behave somewhat differently. You press a few buttons and sit back, and the car steers itself straight into the neighbor’s gazebo.
At least so far, science has discovered no real substitute for looking out the window. The same is true for investing. Funds that can’t deviate from their investment styles will, at some point or another, probably hit a wall. But some, called ”go-anywhere funds,” can, well, go anywhere. A few are worth following anywhere. Choose them carefully, however, or they could lead you astray.
Go-anywhere funds used to be fairly common. But they became a vanishing breed as funds became more numerous and fund analysis became more sophisticated. The demise of the go-anywhere fund may have started when Morningstar, the mutual fund trackers, invented the style box — a methodical way of describing how a fund invests.
Three of the boxes show what size company stocks the fund buys: large-cap, midcap, and small-cap. The ”cap” refers to capitalization, a stock’s share price multiplied by shares outstanding — essentially, its market value. The other three boxes show investment styles. Growth funds look for stocks of companies with soaring earnings. Value funds look for beaten-up stocks that sell for low prices, relative to earnings. Blend funds look for companies with growing earnings and seemingly reasonable stock prices.
All told, you get nine mutual fund investment style boxes, ranging from large-cap growth to small-cap value. These style boxes are a useful starting point for winnowing down Morningstar’s database of more than 10,000 stock funds, and for comparing funds.
Go-anywhere funds are too squirrelly to fit neatly into a style box. Financial advisers, who sell most mutual fund shares, usually construct fund portfolios according to those style boxes. And neither investors nor advisers like discovering that their large-company growth fund has sunk 20% of its assets into something unexpected — like bonds.
That’s just what happened to Fidelity Magellan in 1996. Then-manager Jeff Vinik thought interest rates would fall, boosting bond prices. But rates rose, and the fund rose only 11.7% in 1996, vs. 19.5% for the average stock mutual fund. That was enough to send Vinik packing. He left Magellan and started his own hedge fund, which subsequently clobbered Magellan.
Since then, few funds have strayed from their style boxes. During the late 1990s, that was a good thing, particularly for large-company growth funds, which soared. In the bear market, however, some funds that stay focused on their style boxes ran straight into the ground. For example, the Lipper Large-Company Growth Index, which measures the performance of the largest funds in the category, has fallen 52% the past three years, vs. a 12% loss for the Standard & Poor’s 500-stock index.
By contrast, some go-anywhere funds are looking pretty smart. Quaker Aggressive Growth, for example, has soared 116% the past five years, vs. an 11% loss for the S&P 500. Co-managers Manu Daftary and Chris Perras have parked up to half the fund’s assets in money market securities, or cash.
Currently, the fund has less than 10% in cash, Perras says. And while it has its share of high-growth, high-risk stocks, it also has big stakes in giants like Citigroup and Aetna. ”There are generally stocks that work,” Perras says. ”They just might not be real sexy.”
Go-anywhere funds tend to move between large and small-company stocks but often stay true to their investment style. Oakmark Select, for example, looks for bargains among large and small stocks — but wouldn’t go near a high-priced one.
The problem with go-anywhere funds: Sometimes they make big, bad calls, and you wish you hadn’t gone with them. For example, the American Heritage fund made a big bet on Senetek, a British company whose injectable impotence drug wilted in comparison with Viagra. The fund has lost an average 25% every year for the past decade. So if you invest in a go-anywhere fund, look for one whose manager has a history of not getting lost too often. The best-performing go-anywhere funds are in the chart.
