By Charles Gasparino and Pui-Wing Tam
Call them the incredible shrinking mutual funds.
These are 10 funds, which, for one reason or another, performed so poorly in 1998 that they caused investors to yank billions of dollars from them.
Investors pulled more money from these portfolios than from any others in the business -- a combined $24.2 billion, according to Financial Research Corp., Boston. But did investors react too rashly when they dumped shares? Maybe, maybe not. Here follow snapshots of five of the mutual-fund laggards, with a few lessons to be learned:
Merrill Lynch Global Allocation Fund /zigman2/quotes/205546109/realtime MALOX +0.83% tops last year's list of underachievers. Investors pulled $4.15 billion from the fund, a bigger withdrawal than at any fund tracked by Financial Research. Merrill Lynch & Co. officials say the actual level of "net redemptions" is a bit lower when you take into account reinvested dividends, but there's no disputing that the fund, which ended the year with $9.35 billion in assets, had a poor 1998; its B share class declined 0.4% in 1998, which is one of the weakest performances in its category, according to fund-tracker Morningstar Inc.
Officials at Merrill say the fund wasn't always so bad; indeed, its three-year and five-year returns place it in the middle of its peer group, Morningstar says. In a prepared statement, Merrill Lynch says the fund's performance "was directly affected by financial turmoil" in emerging markets, including Russia and Latin America.
Lesson: Be prepared for wild swings in funds that invest in emerging markets, particularly those that are heavily exposed to a few countries.
Brandywine Fund /zigman2/quotes/201870316/realtime BRWIX +1.00% , managed by former mutual-fund superstar Foster Friess, ranked among the worse funds in Morningstar's growth category, declining 0.65%. Investors pulled $3.38 billion from the fund, the second-worst showing, as assets fell to $4.89 billion. Mr. Friess made two big mistakes: He jumped out of stocks in late 1997, only to miss out on a rally in technology shares during the first quarter of 1998, and he got back into the market right before the market began to decline last year. Mr. Friess's spokesman, Chris Long, says the fund has gained about 50% since the October market low by sticking to its discipline of researching and snapping up stocks that Mr. Friess believes will produce strong earnings growth.
Templeton Foreign Fund /zigman2/quotes/205253515/realtime TEMFX +1.25% lost $2.73 billion in investor cash and its assets closed the year at $12.05 billion. The fund's performance declined 4.89% last year and ranked among the worst foreign-stock funds. Holly Gibson, a spokeswoman for Franklin Resources /zigman2/quotes/201997162/composite BEN +0.35% Inc., the San Mateo, Calif.-based parent of Templeton Funds, blames the investor selling on the lingering Asian economic crisis and economic chaos in Russia and Brazil.
Once again, investors should be wary of funds that take big bets in a few countries.
Vanguard Group's Windsor Fund /zigman2/quotes/210492600/realtime VWNDX +1.06% got hit with net withdrawals totaling $2.63 billion, bringing assets to $18.19 billion. The fund had an unimpressive 1998 gain of 0.81%, putting it in the bottom 6% of its class, according to Morningstar.
Fund manager Charles Freeman, who took over for Windsor's lengendary fund manager John Neff in 1996, couldn't be reached for comment. John Woerth, a spokesman for the Malvern, Pa., fund group, says part of the reason why Windsor is experiencing such a drain is that it isn't taking in much new cash because it remains closed to most new investors. Windsor is "underperforming as it has done in stretches in the past," but before jumping out, he adds, investors should consider that Windsor's "value style" of investing -- a style that generally shies away from big-company stocks that pepper the highflying Standard & Poor's 500-stock index -- may soon come back into favor.
Fidelity Value Fund /zigman2/quotes/207123175/realtime FDVLX +1.23% experienced $2.31 billion in net withdrawals and ended the year with $5.52 billion in assets. As with Windsor, officials blame it on the fund's value style of investing. If and when this style comes back, Fidelity Value should rebound because fund manager Richard Fentin takes a strict value approach, a Fidelity spokesman says. The other five funds with the largest outflows of investor money are: Neuberger Berman Guardian Fund /zigman2/quotes/205078972/realtime NGUAX +0.51% ; Merrill Lynch Growth Fund ; AIM Constellation ; Fidelity Growth Company /zigman2/quotes/208296964/realtime FDGRX +1.04% fund, and PBHG Growth /zigman2/quotes/201030094/composite PBHG 0.00% .