have done incredibly well over the last three years,” says Blitzer. As earnings growth weakens, value stocks-those trading at a P/E less than the overall market–stand a very good chance of delivering good returns. Finally, with interest rates falling, the bond market looks to do well.
A GUIDE TO BE’S LIST OF TOP FUNDS
This year, BLACK ENTERPRISE has focused our annual list on the top “no load” mutual funds. The top tier in each investing category is ranked according to its three-year average annual return to include as many of the newer funds as possible. As anyone who follows the business knows, everyone and their broker it seems has come up with a new mutual fund during the last few years. Between 1990 and last year, the roster of funds had roughly doubled, going from 2,900 to nearly 7,000 with no end in sight.
If Madison Avenue’s advertising gurus were to put a little brainpower behind a slogan to sell index funds, it might run a little like this: “Less Hassle, Better Results.” As the investment industry’s no-frills product, index funds cost little to put together and are simple to manage. They buy up all the shares that belong to an index–more often than not the S&P 500–then sit back and let their portfolio go to work mimicking the ups and downs of the stock market. That’s been a lucrative strategy over the past few years, especially considering the average total return for equity funds in the past five and 10 years has been 17% and 15%, respectively, while index funds have posted 20% and 17% for the same periods.
And for the frugal investor, index funds spend less of your hard-earned money on operations. Since index funds have a low portfolio turnover and trade infrequently, they save money. A well-run index racks up expenses amounting to no more than 0.2% of its assets, compared to an average 1.5% for equity mutual funds. “Indexing is one way to play the market and minimize risk,” says Sam Weiser, national director of Ernst & Young’s Investment Advisory Services. “And in terms of costs, the funds are far cheaper than actively managed ones.”
The success index funds has enjoyed could well continue through 1998. Index funds stand a good chance a beating out actively managed stock fund whenever investors flock to the largest, most visible corporations as a hedge against market volatility. That’s what propelled the S&P 500 in 1997. With investors a bit nervous about the market and unsure that stocks can continue their tremendous gains, the large capitalization stocks look to continue to do well this year.
There’s another plus to investing in index funds this year. The same large companies in the S&P 500 whose stocks have done well are using their shares in a shopping spree of acquisitions. And, what better targets than other large companies? says Standard & Poor’s David Blitzer. “We’ve seen that a number of the companies in the index have been take-out targets over the last couple