The Bubble in Concept Stocks

The Bubble in Concept Stocks

Performance Comes to the Market

The next speculative mania came into being during the mid-sixties, when there was heightened competition among mutual funds for the customer’s dollar. In such an atmosphere, it is obvious that it would be easier to sell a fund with stocks in its portfolio that went up in value faster than the stocks in its competitors’ portfolios.

And perform the funds did – at least over short periods of time. Fred Carr’s highly publicized Enterprise Fund racked up a 117 percent total return (including both dividends and capital gains) in 1967 and followed this with a 44 percent return in 1968. The corresponding figures for the Standard & Poor’s 500-Stock Index were 25 percent and 11 percent, respectively. This performance brought large amounts of new money into the fund, and into other funds that could boast glamorous performances. The public no longer bet on the horse but rather on the jockey.

How did these jockeys do it? They concentrated the portfolio in dynamic stocks. Take the Dreyfus Fund and the growth-oriented Fidelity Funds. Jack Dreyfus, a high-stakes bridge player, got a running start on the performance record by investing heavily in Polaroid during the company’s most rapid growth stage. Fidelity, run by Edward Johnson and Gerald Tsai, also held large blocks of stock in a relatively few rapidly growing companies, however. At the sing of a better story, they would quickly switch. Both funds chalked up impressive successes in the mid-sixties and this led to many imitators. The camp followers were quickly given the accolade “go-go”funds and the fund managers were often called “the youthful gunslingers.” Nothing succeeds so well as success,” Talleyrand once observed, and this was certainly true for the performance funds in their early years – the customers’ dollars flowed in.

Concept stocks. Photo by Elena.

The fickleness of men like Gerry Tsai extended even to their own relationships. Feeling he could make a better story on his own. Tsai left Fidelity inn February 1966. In retrospect hi ambitions were modest: He felt he would be able to raise $25 million in an initial offering for his own fund, the Manhattan Fund. His underwriters, Bache & Co., agreed and opened their subscription books for orders. Both found out that Gerry didn’t know his own multiple: $274 million was subscribed on the first day. Within a year, Gerry Tsai had more than $400 million to manage. Tsai became the first superstar of the performance game and brokers could sound wise by watching the ticker tape and saying. “Ah, Gerry is buying again.”

The performance game was not limited to mutual funds. It spread to all kinds of investing institutions. Businessmen who had to make constantly larger contributions to their workers’ pension funds to meet retirement obligations began to ask pointedly whether they might be able to reduce their current expenses bu switching more of the fund from fixed-income bonds into common stocks with exciting growth possibilities. Even university endowment-fund managers were pressured to strive for performance. McGeorge Bundy of the Ford Foundation chided the portfolio managers of universities:

It is far from clear that trusties have reason to be proud of their performance in making money for their colleges. We recognize the risks of unconventional investing, but the true test of performance in the handling of money is the record of achievement, not the opinion of the respectable. We have the preliminary impression that over the long run caution has cost our colleges and universities much more than imprudence or excessive-risk-taking.