Funds for the Long Haul

In this semiannualmutual fund roundupwe identify 90 top-performingfunds ranked by three-year returns

The president of the united states is George Bush, the economy is staggering, and financial scandals are in the headlines. If the previous sentence seems less than startling, consider the context: It describes 1992, although it sounds like 2002. George Herbert Walker Bush was in the White House at the time, and revelations about the Bank of Credit and Commerce International (BCCI) led to the indictments of Washington insiders. (Today, Bush’s son, “W,” wrestles with the financial fallout from a company called Enron, among others.)

As for the economy, a recession officially ended in 1991 but a “jobless recovery” lingered on. As The Wall Street Journal recently put it, “Job losses continued intermittently through 1991 and early 1992.” At the end of that year, Bill Clinton unseated an incumbent president and Gulf War conqueror by telling himself (and the voters), “It’s the economy, stupid.”

From that point, an eventful decade ensued on Wall Street. The stock market enjoyed an unprecedented boom from late 1994 to early 2000, only to suffer through the current, painful two-year-plus slump. The bottom line? After all the thrills and chills, U.S. stock funds returned 10.4% for the 10-year period from 1992 through the first half of 2002. According to Chicago-based Morningstar Inc., that’s just about the average stock market return for the past 50 and 75 years. And chances are a similar article in 2012 will read that U.S. stock funds had gained 10% or 11% a year for the intervening 10 years.

Among the major fund categories, small-cap value funds had the best-annualized returns (13.36%), while large-cap growth funds (8.62%) brought up the rear for the end of the second quarter. If you looked at the same statistics two years ago, the positions would have been reversed. “In any given year, you see the different fund classes in a different order,” says Mark Spradley, an account vice president with UBS PaineWebber in Largo, Maryland. “But over the long-term, you can expect performance in each asset class to be fairly similar.”

With the economy in a prolonged slump, results are what everyone is interested in. Normally, we would provide you with a list of the best-performing mutual funds over the last six months or a year. This year, we thought it best to rank our list of funds by three-year performance (see chart). That way you’ll stand a better chance of garnering solid long-term results from your mutual funds while avoiding the exciting leaps and depressing plunges that come along the way. Adhering to the simple strategies that follow, and using our mutual fund chart for reference, can help you find the right path.

PUT TOGETHER A PORTFOLIO, NOT A POTPOURRI
As the past few years have shown, various investments go in and out of favor. Therefore, you should spread your mutual fund bets wisely. “Investors need different types of funds, not just different funds,” says Marilyn Broussard, a certified financial planner with Waddell & Reed, a financial services firm in St. Paul, Minnesota. You’re not really diversified if you

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