SunAmerica Offers Narrow Slices of Investment Pie

A small but expanding group of portfolios from SunAmerica Asset Management could serve as a model for what’s ahead in the mutual fund business.

Each of the eight Style Select funds pursues a narrowly defined investment objective, such as buying large value stocks or small growth companies. In addition, each portfolio makes use of three independent money managers, to reduce the risks if one stock picker stumbles.

These funds would be handy for someone carefully pursuing asset allocation, a strategy that seeks to boost returns and reduce risk by diversifying among different types of assets and investment styles.

In fact, many of the SunAmerica portfolios correspond to the styles that researcher Morningstar Inc. of Chicago now uses to classify mutual funds.

By purchasing mutual funds with a narrow investment focus, it’s easy to keep track of how your overall portfolio is situated at a given moment.

Investors cannot know how their portfolio is diversified if they own several free-ranging funds whose managers shift frequently among, say, bonds, cash or different types of stocks.

“If you want to construct a strong building, you cannot do it if the bricks continually change shape,” said Russel Kinnel, a senior equities manager at Morningstar. “Investors can reach their goals more easily by choosing funds from narrowly defined categories rather than vague objectives.”

To make sure the funds invest according to their stated focus, SunAmerica has hired Morningstar to check the portfolio holdings once a month.

Large institutional investors already construct portfolios by dividing their money first among different asset categories and then among different investment advisory firms.

Frank Russell Co. in Tacoma, Wash., offers such products to big-dollar clients and those working with certain financial advisors, as does SEI Financial Management in Oaks, Pa.

SunAmerica, through its Style Select portfolios, is expanding this concept to individuals who invest through a broker or financial planner.

“We think we’re on the cutting edge of an important future trend,” said J. Steven Neamtz, executive vice president at SunAmerica in New York.

SunAmerica has signed up an impressive list of money managers to steer its various portfolios. For example, assets in the firm’s large-stock growth fund have been divided equally among Janus Capital in Denver, L. Roy Papp & Associates in Phoenix and Atlanta-based Montag & Caldwell. Other companies managing portfolio slices include Berger Associates in Denver, Wellington Management in Boston, Baltimore-based T. Rowe Price Associates and Davis Selected Advisers in Santa Fe, N.M.--along with SunAmerica itself.

By now, you might be asking why an index fund couldn’t do the same job of targeting a specific investment approach. The answer is that index funds do, in fact, fare very well in this capacity, especially if you factor in their low expenses.

However, style-specific portfolios that utilize active managers offer the potential to beat the broad market--assuming your managers are astute stock pickers who can overcome the expense drag.

“You want to bring the predictability of an index fund and the potential to add value with the best managers,” said John Merrill, a financial advisor at Tanglewood Capital Management in Houston.

Merrill said he likes the concept behind the SunAmerica funds but uses no-load portfolios exclusively.

By hiring three managers for each portfolio, the SunAmerica funds have a good chance of delivering fairly consistent returns. That’s because even within a fairly narrow category, no two managers will perform exactly alike, which provides diversification potential.

Suppose you want to buy a fund that owns large growth stocks. You could find one manager who buys companies that enjoy dominant brands and another manager who favors firms with accelerating profits.

“You want managers who add value but whose returns aren’t tightly correlated,” said Randall Lert, chief investment officer at Frank Russell.

While the concept is intriguing, the results so far have been mixed for the four Style Select portfolios that SunAmerica launched late last year.

The firm’s aggressive-growth portfolio was up 23.3% during the first 10 months of 1997, placing it among the top 20% of rival funds, says Morningstar. Another good performer over this short span has been the value portfolio, among the top third of funds in its classification, with a 10-month gain of 25.9%.

But SunAmerica’s Mid-Cap Growth and International Equity portfolios are near the bottom of their peer groups for 1997.

SunAmerica ([800] 858-8850) in October added four portfolios that target the following stock-picking categories: large-cap growth, large-cap value, large-cap blend and small-cap value.

The minimum investment on each is $500 (or $250 in individual retirement accounts), and the funds carry sales charges of up to 5.75%. All told, the Style Select portfolios have attracted roughly $500 million in assets.

Russ Wiles is a mutual fund columnist for The Times. He can be reached at russ.wiles@pni.com