tracked by Morningstar had positive returns last year — even junk bond funds gained a tad more than 1%. Corporate bond funds generally beat government bond funds by a slight margin in 2001, with the former returning more than 7%. (See “Take Safety in Bonds,” this issue.)
Which investors fared — and will continue to fare — best in this environment? Quality hounds. As the U.S. economy struggles to recover from a recession and the stock market labors to rebound, fund investors need to invest in class acts among many different classes of funds.
To help you find these top performers, BE once again provides you with our semiannual ranking of the top 70 mutual funds. Morningstar Inc. has tracked the 12-month performance of the funds in 14 categories. In evaluating equity vehicles, Morningstar determines domestic stock funds by the size of the companies they own. Funds that tend to hold the largest 5% of U.S. companies — companies with a market value, or capitalization, of more than $8.54 billion — are considered large-cap funds. Funds that purchase the smallest 20% of U.S. companies — companies valued at $1.31 billion or less — are small-cap funds. Mid-cap funds fall between the two.
Diversified U.S. equity funds are also classified according to the prices of the stocks they own. Value funds own companies with low share prices relative to their earnings and asset values. Recently, value funds held shares of such blue chips as Citigroup (NYSE: C) and Exxon Mobil (NYSE: XOM). On the other hand, growth funds own stocks with relatively high prices compared to their earnings and asset values. Growth funds have recently bought Pfizer (NYSE: PFE), Microsoft (Nasdaq:MSFT) and Cisco Systems (Nasdaq: CSCO), which are expected to post above average earnings growth in future years.
Blend funds, however, favor neither value stocks nor growth stocks.
Now that 2001 is fodder for the history books, what funds can you expect to pay off in 2002? The following are fund categories you should add to your portfolio.
VALUE FUNDS TRY FOR A THREE-PEAT
After two years of setting the pace in equities, value funds are still favored by many investors and advisors. In fact, they will continue to be embraced as long as the economy remains sluggish, and the war on terrorism dampens investors’ spirits. Says Jeffrey B. Hammond, a financial planner in Chicago, “I think value funds will continue to out-perform growth funds. People remember the [tech] bubble bursting so they are still not confident about investing in the big growth stocks.” Among his favorites: Kenwood Growth & Income (KNWDX), a mid-cap value fund that can be found on the BE Black Mutual Fund Index (See Moneywise, this issue.)
Like her husband, Alex, Karen Brown is pleased to manage a moderate portfolio rich with value funds. “We’re both semiretired,” she says, “so we didn’t want to take on a great deal of risk in our investments. A few years ago, growth stocks had become so expensive that it seemed like a good time to cut back.”
Most of all, she’s learned not to track