Complainers May Be Culprits When It Comes to Volatility

By Ian McDonald

Seems like every day fund managers bemoan how volatile the stock market has become. Turns out they're not only right. They may be partly responsible.

A look at market data over the past decade shows that yes, big moves in the stock market have gotten a lot more common in recent years. From 1993 through 1997, the Dow Jones Industrial Average rose or fell by 1% or more on 41 days per year, on average. But over the past five calendar years, that figure has risen to more than 100 days on average, according to the Hirsch Organization, the Old Tappan, N.J.-based publisher of the Stock Trader's Almanac.

The same goes for the Standard & Poor's 500-stock index and the tech-laden Nasdaq composite. Each index is on the same pace so far this year.

Mutual-fund firms say volatility can be problematic. Managers see prospective holdings ramp up before they finish researching a company, for example. Large moves among a fund's holdings can also rattle shareholders, triggering redemptions.

So what gives?

Part of the issue is information flow. "News travels faster now and that plays out in the stock market," says Jeff Hirsch, editor of the Almanac. "Ten years ago most people didn't really know what happened in the market until the nightly news or morning paper. Now grandma gets real-time quotes online."

Other popular culprits, according to mutual-fund managers, are the rising number of aggressive hedge funds piling into and out of stocks. A flurry of buying or selling can bid a stock's price way up or jump on it with both feet, respectively. More than 1,600 new hedge funds, private investment partnerships for institutions and well-heeled individuals, launched in 2001 and 2002 combined, according to one recent estimate, bringing the nation's total to some 4,100. Still, data on the holdings or trading patterns of hedge funds are spotty.

Data on mutual-fund trading, however, are available. And, in aggregate at least, mutual-fund managers haven't exactly adhered to the "buy and hold" mantras touted in their marketing brochures.

Over the past five calendar years, the nation's average stock fund has posted a 106.3% turnover rate. A fund's turnover rate is roughly defined as the percentage of its portfolio that changed in a given year. That's way up from an 80.6% average turnover rate in the previous five years, according to Chicago investment researcher Morningstar Inc.