Lipper Senior Research Analyst Don Cassidy on KTLK AM-760

Thursday, October 31, 2002

A. Yes, and I must say it seems appropriate that we take up this subjecton Halloween, when many strange things are known to happen.

Q. OK... I guess the big one is whether equity funds will reverse their3-year decline in 2003.

A. Well, in all of this, we really have to name some assumptions, becauseotherwise it is just a total guessing game.

Q. You mean about the economy and so on?

A. Yes, and also about the presumed Iraq war and any otherless-foreseeable international events. I am going to be perhaps a bitoptimistic and assume that the Iraq war goes fairly well, not asspectacularly fast as the 1991 Gulf War of course, and that we do notexperience any upsetting domestic retaliation like bio/chemical attacks.Those could have demoralizing effects on the economy if we did, and upsetmy forecast.

Q. OK, so assuming all of that.....?

A. Even if it turns out that the weak confidence numbers from Tuesday DOmean we are in a mild second dip of recession, I suspect we will be out ofit by spring. The stock market has a habit of anticipating economic swingsabout 6-9 months in advance, so I am willing to assume that the bottoms inJuly and early October 2002 were in fact the end of the bear. To which wecan all say "RIP" after almost 31 months!

Q. Why are you pretty confident about that? A lot of other people are notconvinced...

A. Five reasons: July 24 saw an absolutely classic capitulation thatpeople call a selling panic, on record high NYSE volume. Those scaryevents take out just about any potential sellers who are still around andprone to being flushed out. Second, although we slightly made new lows onthe major indices in early October, there was no further panic, and volumewas lighter. Net redemptions in mutual funds were well below the Julyrecord pace. Third, the July/October double bottom forms a classic "W"pattern, which is quite often seen at major long-term market lows (look at1990, 1987, 1974, and 1962 for examples). The second low point CAN beslightly lower, as it was, as long as there is a good bounce. We are infact up about 1,200 Dow points since the morning of October 10. Fourth,the market's tone most days is much different than before the bottom... itcan handle bad news and not crumble (like the shocking confidence number onTuesday, when the Dow came back the whole 170 points!) -- and declines seemto run out rather than become waterfalls. Finally, for whatever it may beworth, 9 previous market bottoms were made during the 20th century INOCTOBERS. This looks like yet another in that seasonal pattern. I couldeven go on about 4-year bottoming cycles and third years of presidentialterms, but time is limited.

Q. OK, so are you saying 2003 will be an up year for stock funds?

A. I believe so, but not a spectacular one. I admit I said that about2002 as well, so take it as you may... The historical pattern is for asharp but short strong initial rebound such as we have seen, followedafterward- by more-moderate gains. Late 1987 followed by a slower rise in1988 is a recent example. Also, people were so badly burned bygrowth-style investing since 2000 that I think it will take some timebefore they come rushing back writing big checks, and especially so in thefast-growth parts of the market.

Q. Does that mean value-type funds stay the leaders?

A. In my personal view, since Lipper itself does not make predictions, Ithink so. I think people have found a new fondness for dividends and valueand things that feel solid. One positive exception might be biotechnology.Plus the earnings have yet to come back in technology and some other growthareas. And I think people want proof, not promises.

Q. What about bonds and bond funds, Don?

A. First, I believe money will continue to flow into bond funds. Peoplewill remain skittish about stocks for some time, and many people have goneback to basics and adopted asset allocation as a personal rule. The $125billion of bond-fund inflows, plus another $9 billion in new closed-endfunds, over the past 12 months has nearly been enough to equal the renewedfederal deficit in that period. The amounts are really huge!

Q. But what if interest rates rise?

A. That's a big one. I seem to be in the minority on this point, but Ithink the domestic and world economies are still soft enough such thatthere will be little price pressure and that the Fed will remain concernedabout recession for some months ahead. So while rates ARE historicallylow, that does not mean they MUST soon go up.

Q. Aren't investors who have been rushing into bond funds taking a chanceon losing principal if rates DO rise?

A. Yes, but only a moderate one. About 90% of the net new money that hasgone into bond funds has avoided the long-term end and has stayed in theshort and intermediate-maturity types of funds. So people have been prettycareful and savvy about that.

Q. Don, if people had the courage to go back now into only one fund, untilthings start to work out and stabilize a bit more, what type of fund wouldyou mention?

A. I honestly think a balanced fund is a good choice for the cautious.These of course are a mix of stocks and bonds, so you are not making aheavy bet on either one. And I would try to pick a balanced fund that hasdone fairly well in the down market, meaning that their stock picks tendedto be conservative rather than aggressive.

Q. How can people figure out which ones those are?

A. Glad you asked: I would suggest going to LipperLeaders.com and lookingfor funds with high grades (one or 2 on a 5 scale) in "preservation" and in"consistency." These characteristics are measured over 36-month periods inour system, and that will cover the bear market conveniently. I reallythink people need to put their toes back in the water rather than stayingin money funds or CDs. Otherwise, it might take a couple of years beforethey rebuild their confidence, and by then they will have missed somedecent returns from the equity side. Better to buy low than relativelyhigh much later on.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).