Jewish World Review April 30, 2003 / 28 Nissan, 5763

Chet Currier

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Consumer Reports


Bring Back Peter Lynch! Free-Range Funds Reviving


http://www.jewishworldreview.com | (Bloomberg) As tough as the early 2000s may be in the investment business, they are shaping up as a rare opportunity for go-your-own-way money managers.

Seldom in recent times have independent thinkers running mutual funds and other pools of money had a better chance to show their stuff, moving from one security to another and one market to another as their judgment dictates.

Call it free-range money management: no limits on style or size of issuer. It's an approach that worked wonders in the hands of past stalwarts such as Peter Lynch, the famed manager of the Fidelity Magellan Fund from 1977 until 1990.

"I was allowed to buy anything -- domestic stocks of all varieties, foreign stocks, even bonds,'' Lynch wrote in his 1994 book "Beating the Street.'' "This gave me the latitude to fully exploit my bloodhound style.''

The free-range method has been under siege for the last decade from classifiers, consultants and assorted control freaks trying to turn the art of fund management into something more precise, more scientific. However noble their intentions, the results have been, uh, mixed.

The whole sort-and-systematize train got sidetracked by the bear market that struck as the 21st Century arrived. Who cares to make painstaking distinctions between, say, growth and value stocks when we see that the Standard & Poor's Barra Value Index declined 4.1 percent a year in the five years through March 31 while the S&P Barra Growth Index lost a virtually identical 4.2 percent a year?

Big and Small

Ditto for big versus small stocks, given a five-year annualized loss of 4 percent for the Russell 2000 Index of smaller stocks against 3.6 percent for the big-stock Russell 1000 Index.

That opens the way for the return of the rugged individualist yearning to break free from style boxes, index comparisons and other such '90s rigmarole.

Just how successful managers will be in seizing this chance remains to be seen. Nothing promises to be easy about running up results worth showing off in the kind of sluggish, low-growth environment widely predicted for the next several years. Note, though, that this is exactly how things were in the '70s when Lynch took the helm at Magellan.

Whatever the market climate, the Iron Law of Financial Mediocrity still holds. It is simply not possible for a majority of investors, no matter how great their collective acumen, to achieve above-the-median results. Index funds, with their lower expenses, still enjoy a natural edge on the average active manager.

Outside the Box

Though the mania for index funds that hit the markets in the late 1990s has lost some of its zip, indexing is here to stay. Stronger candidates for the scrap heap are the popular '90s practices of style-specific investing and the marketing and managing of active funds on the basis of index comparisons. Absolute returns pay investors' bills.

Another Big Idea of the '90s that has lapsed into disfavor is momentum investing. The imperative, you remember, was to buy whatever was already doing well, especially in the stock market, because strength begot further strength.

Now the momentum game has moved on to real estate. In today's edgy, erratic securities markets momentum ideas are scarce and momentum players scarcer. In its place, we see more and more examples of the time-honored approach known as contrary opinion.

Example: a favorable nod toward depressed Japanese stocks that came the other day from Bridgewater Associates, a Westport, Connecticut money manager.

Who Cares?

"Investors appear to have grown tired of being burned by Japan,'' the firm said. "Equities and bond yields are at new lows, despite the apparent improvement in the economy. With no one else willing to take a bite, we are starting to build a little bit of an appetite for Japanese equities.''

Contrary opinion is well suited to a fickle trading-range environment. Even so, the difficulty of practicing it should never be underestimated, since by definition it involves going against the prevailing mood. Constant mood swings can mandate frequent strategy changes, increasing costs and chances to make mistakes.

The good old simple buy-and-hold philosophy, so widely favored in the '90s, has also been shown to be much more challenging than was widely supposed. Patience runs out.

So bring on the free-range money managers. They may never get a better chance.

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Chet Currier is a columnist for Bloomberg News. Comment by clicking here.

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