Things could be better … but they could be a lot worse, too. That was the state of mutual funds in mid-2004. As of the end of May, stock funds were up a trifle and bond funds had lost a little ground. Considering the geopolitical turmoil and rising interest rates we’ve already seen this year (the Federal Reserve hiked the rate to 1.25% on June 30, the first increase in four years), investors can take some comfort in the fact that we haven’t seen a repeat of the 2000 — 2002 bear market, when stock funds suffered three straight years of severe losses.
Here are the highlights so far, according to Chicago-based mutual fund research firm Morningstar Inc.:
Domestic equity funds were up about 1.4% on average. Among the major categories of stock funds, the best performances were turned in by those holding small-company value (bargain priced) stocks.
Taxable bond funds lost more principal than they paid out in interest. (Some interest rates rose, which drove down the price.) Net of these payouts and losses, the average bond fund lost around 1%.
Only a few subcategories of funds didn’t come anywhere near breaking even. Foreign, small-company value funds and domestic healthcare funds did the best, gaining a far-from-breathtaking 6%. The big loser was the precious metals category of funds, mainly gold, which lost 17% after three straight years of sparkling returns.
Going forward, it’s impossible to know whether a surging economy will cause funds to move up or if funds will topple due to factors such as inflation, lack of consumer confidence, and terrorism. Alternatively, they might just putter along in what the pros call a “trading range” for the rest of the year. Amid such uncertainty, it’s best to hold funds that can preserve your principal in tough times
while still giving you a shot at decent returns in case the bull charges ahead.
“Start with a basic asset allocation using different types of mutual funds,” says Christopher Traulsen, a senior analyst at Morningstar. “If you’re relatively young and able to tolerate risks, you might hold 85% of your portfolio in stock funds and 15% in bond funds, which can provide income and reduce volatility. Investors who are more concerned about risks might want to own more bond funds while keeping, say, 35% in stock funds to maintain some growth potential.”
STAYING CONSERVATIVE
Brian Pollard, 40, and Xandria Sutherland-Pollard, 41, are dentists with a practice in Liverpool, New York. They think the best way to reduce investment risk is to put some money into bond funds. “We held some stock funds a few years ago,” says Brian.
“Even though they invested in blue-chip companies, the stock funds went spiraling down. We don’t have a lot of tolerance for risk in our investments, so we switched to a portfolio that was heavy in bonds and cash.”
Vicki Brackens, a financial planner with MetLife in Syracuse, New York, is the financial adviser to the Pollards. As she recalls, the naturally conservative couple became leery of stocks when the downturn began in 2000. “After two or three quarters of seeing losses on their statements, they’d had enough,” says Brackens. “Investors must be aware of their emotional makeup so they know how much risk they can take. For Brian and Xandria, it was time to pull out of the stock market.”
Brackens recommended that the Pollards hold some cash as well as shares of Loomis Sayles Strategic Income (NEZYX). The fund, which holds a mix of foreign, U.S. government, and junk bonds, has produced excellent annualized returns for the past three years, making it one of the best in its category. “It looks like the market is doing better and stocks have recovered a bit,” says Xandria. “Now [we can think about increasing] our investments in stocks. Even though we’re still conservative, we’re willing to take some risks to get higher returns.”
To that end, Brackens plans to suggest some stock funds to the Pollards. Her recommendations will include Oakmark (OAKMX), which holds the stocks of large companies, and State Street Research Aurora (SSRAX), which specializes in small companies. So-called “focus” funds invest in relatively few companies so investors get the fund manager’s top picks. “No matter how many equity funds they choose, I will advise them to invest through dollar cost averaging,” says Brackens. “If you invest a certain amount each month, you’ll buy more shares when the prices drop and you won’t run the risk of putting in all your money at a peak price.”
Brian is willing to tiptoe back into stock funds. “Even if we become more aggressive, we’d want to keep a substantial amount—perhaps one-third of our investments—in cash and fixed income. We like to know that at least one-third of our money can’t disappear,” he explains. When it comes to stocks, the Pollards say investing in mutual funds adds another layer of protection. “We don’t have time to stay on top of individual stocks,” says Xandria. “With mutual funds, you have a diversification of companies so you won’t lose as much if one company goes under. Mutual funds are safer and more reliable.”
KEEPING BALANCED
The extended bear market also made an impression on Samona Johnson, 35, a buyer of aircraft parts for a manufacturer and distributor in Cleveland. “I was nervous when I saw the market keep
“It was important that she kept investing,” says Johnson’s adviser, Jesse Brown, president of Krystal Investment Management in Chicago and author of Pay Yourself First (Wiley; $14.95). “The worst thing you can do is stop investing, because you’ll either spend the money or hold cash which won’t yield very much. Recently, Samona moved from Putnam Growth and Income to Putnam Capital Opportunities (PCOAX), which is more aggressive and invests in small and medium-sized companies. She made the change because she wanted more growth and the chance to reap higher returns in preparation for her retirement, even if she has to take some risks.”
Doing all of your investing within one mutual fund family makes sense to Brown: “As market conditions and your goals change over time, you may decide to switch mutual funds. Keeping within one group of funds will probably reduce your transaction costs.” In addition, getting to see all of your mutual funds on one statement can help with tax and investment planning.
Do the recent allegations of improper practices at Putnam trouble Brown? (For more on mutual fund scandals and their impact on investors, see “How Do the Mutual Fund Scandals Affect You?” Moneywise, February 2004.) “The company has new leadership and has put new ethical standards in place,” he says. “After talking personally with the new top executives, I’m more confident than I’ve ever been about Putnam’s funds.” Putnam isn’t the only fund family that wins Brown’s approval; he also names Scudder and American funds. In particular, he cites Scudder Lifecycle Short Range (BTSRX), Scudder Lifecycle Mid Range (BTLRX), and Scudder Lifecycle Large Cap Value (BTILX). “These are funds with an asset allocation of Scudder’s best funds. Such investments make it easier to decide on a portfolio mix,” explains Brown.
According to Traulsen, several mutual fund families offer “lifestyle” funds, which can provide a “simple solution” to developing an al
location among multiple mutual funds. Vanguard—with its low-cost Target Retirement funds aimed at investors who plan to retire around a specific year—is one such mutual fund family. Brown says, “These types of funds can provide a selection of funds for investors who do not have the money or the research time to invest in many funds. You
“Even the most aggressive investor should hold some bonds or bond funds, though,” says Brown. “They can provide stability when the stock market turns down. I generally recommend an asset allocation of at least 20% [in] bonds and bond funds.” Brown, like Brackens, is a fan of dollar cost averaging, a practice Johnson has taken to heart. “I’ve arranged for money to be automatically invested in my mutual funds each month, and I’m hoping to increase the amount,” she says. “The more I can save now, the more I’ll have later, when I really need it.”
STICKING WITH STOCKS
Not every mutual fund investor is leery of stock funds. Stanley and Terri Wade, 41 and 40, are husband and wife business partners who run a mortgage brokerage firm in Pasadena, California. “We own real estate, individual stocks, and stock funds,” says Stanley. “We’re not interested in bonds or bond funds. At our age, we’re looking for growth in our investments.” Although this may seem aggressive, the Wades are actually more cautious today than they were a few years ago, when more of their portfolio contained aggressive stocks and no mutual funds at all. “We’re definitely more careful today in our investing,” says Terri. “We take our time rather than jump into hot stocks. Buying mutual funds and owning different kinds of stocks is a great way to spread your risks.”
SHIFTING FORTUNES
Arnetta Tolley, an investment adviser at the Pasadena, California, office of Edward Jones Investments, a financial services firm based in St. Louis, agrees that focusing on stock funds makes sense for the Wades. “They can expect to have many good earning years ahead of them. They can afford to take more risk with stock funds from time to time, yet over a long period, they can expect higher returns from stock funds than from bonds or cash,” says Tolley. “What’s more, with interest rates low and expected to rise, I’m reluctant to put a lot of money into bond funds.” At Tolley’s recommendation, the Wades have invested in Hartford Stock (HSTAX), which owns large-company stocks, and Hartford Midcap (HFMCX), which holds medium-sized companies with excellent growth prospects. “These funds are well managed by a solid financial firm,” says Tolley.
The Wades currently have a significant amount of cash, the result of selling some investment property. “Instead of [them] putting all of it back into real estate,” says Tolley, “I’ll suggest that they diversify into different mutual funds,
including Hartford Capital Appreciation (ITHAX) and Hartford Dividend & Growth (IHGIX).” Tolley says the Hartford family is a good fit for the Wades because its stock funds tend to be growth-oriented and on the cutting edge, and the Wades have many years to cash in on the potential appreciation the stock market has historically produced.“For clients who are older—retirees and pre-retirees—I generally recommend American Funds instead,” says Tolley. “Many of those funds are team managed, with extremely long track records, and the [American Funds are] known for a conservative rather than an aggressive investment style.” For these clients, cash flow is provided by American Funds Bond Fund of America (ABNDX), which was yielding nearly 5% at the time of this article. Tolley says, “Among equity funds, I put conservative clients into [American Funds] Investment Company of America (AIVSX), Washington Mutual (AWSHX), Growth Fund of America (AGTHX)—all of which hold large U.S. companies—and New Perspective (ANWPX), which owns large growth companies from around the world.” All of these funds have 30- to 70-year track records.
Kevin Davis, a certified financial planner with Consolidated Financial Services in Dallas, also suggests American Funds to his clients: New Economy (ANEFX), which invests in media, telecommunications, and retail stocks; and American Balanced (ABALX), which holds both stocks and bonds. “American Funds might not have had the highest returns in the 1990s, but they held up better than more aggressive funds when stocks went into a down cycle,” Davis remembers. “I encourage clients to invest for the long term and these are funds you can hold on to your whole life.”
RISING TO THE OCCASION
Among fixed-income funds, Davis favors PIMCO Total Return (PTTAX) and American Funds Bond Fund of America, mentioned above. “These funds hold intermediate-term bonds rather than long-term bonds. Today, the financial markets are expecting interest rates to rise. If so, intermediate-term bond funds will do better than long-term funds,” he says.
In light of the current interest rate environment, Tolley is also staying away from long-term bond funds, preferring to park cash in short-term bank CDs until interest rates move up. But Brown says rising interest rates won’t really affect the average investor. “The Federal Reserve will raise interest rates over the next year, but that is only an indication of a healthy economy,” he explains. “When interest rates start going up, the stock market will not go down. Instead, stock market investors will see this as an indication of prosperity and will begin a buying trend.” If you’ve spread your dollars among solid mutual funds in different categories, you’ll catch the trend, regardless of what investors start buying.
|
B.E.’S TOP MUTUAL FUND PERFORMERS |
||||||
| FUND NAME | TICKER SYMBOL | 1-YEAR RETURN | 3-YEAR RETURN | 5-YEAR RETURN | MINIMUM INITIAL INVESTMENT | PHONE |
|
Large Growth |
||||||
| Legg Mason Growth Prim | LMGTX | 24.31% | 12.93% | 3.47% | $1,000 | 800-822-5544 |
| Marsico 21st Century | MXXIX | 28.29 | 10.29 | NA | 2,500 | 888-860-8686 |
| Nations Marsico 21st Cen Inv A | NMTAX | 27.91 | 9.67 | NA | 1,000 | 800-321-7854 |
| Gartmore US Gr Leaders A | GXXAX | 22.19 | 5.82 | NA | 2,000 | 800-848-0920 |
| Dreyfus Prem Alpha Gr T | BSFAX | 18.84 | 5.68 | 2.84 | 1,000 | 800-554-4611 |
|
Mid Growth |
||||||
| MFS New Endeavor A |
MECAX | 34.32 | 14.10 | NA | 1,000 | 800-225-2606 |
| Hodges | HDPMX | 40.84 | 12.95 | 1.75 | 250 | 866-811-0224 |
| Meridian Growth | MERDX | 33.65 | 10.27 | 14.94 | 1,000 | 800-446-6662 |
| Columbia Acorn Select A | LTFAX | 19.81 | 9.98 | NA | 1,000 | 800-345-6611 |
| Baron Partners | BPTRX | 43.81 | 8.68 | 1.48 | 2,000 | 800-992-2766 |
|
Small Growth |
||||||
| Royce Value Plus | RYVPX | 53.95 | 26.18 | NA | 2,000 | 800-221-4268 |
| FBR Small Cap | FBRVX | 26.66 | 18.91 | 15.75 | 2,000 | 888-888-0025 |
| Century Sm-Cp Sel Inv | CSMVX | 30.15 | 15.82 | NA | 1,000 | 800-321-1928 |
| Henlopen | HENLX | 52.90 | 13.17 | 9.92 | 2,000 | 866-880-0032 |
| Excelsior Small Cap | UMLCX | 42.36 | 12.56 | 9.91 | 500 | 800-446-1012 |
|
Large Blend |
||||||
| Mairs & Power Growth | MPGFX | 26.05 | 10.44 | 10.94 | 2,500 | 800-304-7404 |
| AmSouth Select Eq A | ASECX | 20.21 | 9.11 | 4.42 | 1,000 | 800-451-8382 |
| Matrix Advisors Value | MAVFX | 22.18 | 6.92 | 8.44 | 1,000 | 800-366-6223 |
| Tocqueville | TOCQX | 31.75 | 6.44 | 4.08 | 1,000 | 800-697-3863 |
| Parnassus Equity Inc | PRBLX | 10.16 | 6.42 | 8.04 | 2,000 | 800-999-3505 |
|
Mid Blend |
||||||
| Fidelity Leveraged Co Stk | FLVCX | 41.13 | 26.14 | NA | 10,000 | 800-343-3548 |
| Delaware American Ser A | DASAX | 30.29 | 16.45 | NA | 1,000 | 800-362-7500 |
| RS Contrarian Value | RSCOX | 39.63 | 16.26 | 14.11 | 5,000 | 800-766-3863 |
| Hussman Strategic Growth | HSGFX | 15.22 | 16.14 | NA | 1,000 | 800-487-7626 |
| Delaware American Ser C | DAMCX | 29.26 | 15.60 | NA | 1,000 | 800-362-3863 |
|
Small Blend |
||||||
| Perritt Micro Cap Opport | PRCGX | 42.68 | 20.55 | 20.53 | 1,000 | 800-332-3133 |
| CGM Focus | CGMFX | 33.94 | 17.20 | 25.49 | 2,500 | 800-345-4048 |
| Satuit Capital Micro Cap | SATMX | 41.20 | 16.93 | NA | 1,000 | 800-567-4030 |
| Royce Value | RYVFX | 40.66 | 15.39 | NA | valign=”middle”>2,000 | 800-221-4268 |
| Munder Small-Cap Value A | MNVAX | 37.29 | 15.00 | 14.07 | 2,500 | 800-468-6337 |
|
Large Value |
||||||
| Hancock Classic Value A | PZFVX | 26.89 | 12.12 | 12.46 | 1,000 | 800-225-5291 |
| TCW Galileo Div Foc N | TGIGX | 30.32 | 9.63 | 10.74 | 2,000 | 800-386-3829 |
| Alpine Dynamic Balance | ADBYX | 18.58 | 9.05 | NA | 1,000 | 888-785-5578 |
| PIMCO PEA Value A | PDLAX | 35.58 | 8.26 | 10.94 | 5,000 | 888-877-4626 |
| Cullen Value | CVFCX | 24.24 | 7.58 | NA | 1,000 | =”MIDDLE”>877-485-8586 |
|
Mid Value |
||||||
| Yacktman Focused | YAFFX | 17.22 | 20.94 | 10.03 | 2,500 | 800-525-8258 |
| Yacktman | YACKX | 19.36 | 19.24 | 11.69 | 2,500 | 800-525-8258 |
| Quaker Mid-Cap Value A | QMCVX | 49.12 | 16.33 | 10.47 | 2,000 | 800-220-8888 |
| AllianceBer Small Val A | ABASX | 35.48 | 15.26 | NA | 1,000 | 800-221-5672 |
| Fidelity Sel Constr&Hous | FSHOX | 33.98 | 15.05 | 11.16 | 2,500 | 800-343-3548 |
|
Small Value |
||||||
| Heartland Value Plus | HRVIX | 41.18 | 21.55 | 12.76 | 1,000 | 800-432-7856 |
| James Small Cap | JASCX | 39.50 | 19.72 | 9.78 | 2,000 | 800-995-2637 |
| Pacific Cap Small Cap A | PCSAX | 42.17 | 17.68 | 17.73 | 1,000 | 800-258-9232 |
| American AAdv SmCpVl Pln | AVPAX | 38.49 | 17.27 | 15.34 | 2,500 | 800-388-3344 |
| Aegis Value | AVALX | 27.80 | 16.86 | 18.06 | 10,000 | 800-528-3780 |
| SOURCE: MORNINGSTAR INC. MORNINGSTAR MAKES EVERY EFFORT TO ENSURE THE ACCURACY OF THIS DATA, BUT CANNOT GUARANTEE IT. TOP FUNDS IN EACH CATEGORY, RANKED BY THREE-YEAR RETURNS, SINGLE SHARE CLASS, NO INSTITUTIONAL, NO QUALIFIED ACCESS, OPEN TO THE PUBLIC. RETURNS THROUGH JUNE 30, 2004. | ||||||
|
B.E.’S TOP MUTUAL FUND PERFORMERS |
||||||
|
FUND NAME |
TICKER SYMBOL |
1-YEAR RETURN |
3-YEAR RETURN |
5-YEAR RETURN |
MINIMUM INITIAL INVESTMENT |
PHONE |
|
World Stock |
||||||
| Oakmark Global I | OAKGX | 31.42% | 17.07% | NA% | $1,000 | 800-625-6275 |
| Polaris Global Value | PGVFX | 36.78 | 16.82 | 10.62 | 2,500 | 888-263-5594 |
| Templeton Glob Sm Co A | TEMGX | 42.15 | 13.51 | 7.10 | 1,000 | 800-342-5236 |
| Van Kampen Glb Frnchse A | VGFAX | 24.38 | 12.58 | 14.51 | 1,000 | 800-421-5666 |
| Janus Global Opps | JGVAX | 40.23 | 10.78 | NA | 2,500 | 800-525-3713 |
|
Foreign Large Growth |
||||||
| Marsico Intl Opp | MIOFX | 31.30 | 9.15 | NA | 2,500 | 888-860-8686 |
| Nations Marsico Intl Inv A | MAIOX | 29.97 | 9.09 | NA | 1,000 | 800-321-7854 |
| Hartford IntCapApp A | HNCAX | 38.50 | 8.68 | NA | 1,000 | 888-843-7824 |
| MainStay Intl Equity A | MSEAX | 22.25 | 8.17 | 1.53 | 1,000 | 800-624-6782 |
| Fidelity Aggressive Intl | FIVFX | 20.26 | 7.61 | 2.23 | 2,500 | 800-544-8888 |
|
Long-term Government |
||||||
| AmCent Target 2020 Inv | BTTTX | -6.22 | 9.49 | 8.81 | 2,500 | 800-345-2021 |
| AmCent Target 2015 Inv | BTFTX | -4.82 | 9.47 | 8.89 | 2,500 | 800-345-2021 |
| PIMCO Real Ret A | PRTNX | 3.99 | 9.02 | 9.71 | 5,000 | 888-877-4626 |
| AmCent Target 2025 Inv | BTTRX | -7.28 | 8.75 | 8.17 | 2,500 | 800-345-2021 |
| PIMCO Lg-Trm US Govt A | PFGAX | -3.39 | 8.38 | 8.33 | 5,000 | 888-877-4626 |
|
Intermediate Government |
||||||
| Vanguard Infl-Pro t Secs |
VIPSX | 3.55 | 9.08 | NA | 3,000 | 800-662-7447 |
| FFTW U.S Infl-Indexed | FFIHX | 3.46 | 8.94 | NA | 100,000 | 888-367-3389 |
| AmCent Inf-Adj Bond Inv | ACITX | 2.87 | 8.23 | 8.59 | 2,500 | 800-345-2021 |
| BlackRock Govt Inc Inv A | CCGAX | -0.90 | 7.42 | 7.61 | 500 | 800-441-7762 |
| Vanguard Int-Tm US Trs | VFITX | -1.42 | 6.98 | 7.35 | 3,000 | 800-662-7447 |
|
Short-term Government |
||||||
| AmCent Target 2005 Inv | BTFIX | -0.07 | 5.82 | 6.49 | 2,500 | 800-345-2021 |
| Managers Interm Dur Gov | MGIDX | 1.66 | 5.60 | 6.22 | 2,000 | 800-835-3879 |
| Marshall Govt Inc Inv | MRGIX | 3.10 | 5.22 | 5.67 | 1,000 | 800-236-8560 |
| Salomon Bros Sht/IntmGovA | SUSAX | -1.00 | 5.13 | 5.60 | 250 | 800-446-1013 |
| Northern U.S. Government | NOUGX | -1.49 | 4.95 | 5.67 | 2,500 | 800-595-9111 |
|
Long-term Corporate Bonds |
||||||
| Delaware Ext Dur Bd A | DEEAX | 1.83 | 11.37 | 9.34 | 1,000 | 800-362-7500 |
| Croft-Leominster Income | CLINX | 5.27 | 8.66 | 6.98 | 2,000 | 800-551-0990 |
| Managers Bond | MGFIX | 1.31 | 8.33 | 7.76 | 2,000 | 800-835-3879 |
| Vanguard Long-Tm Corp Bd | VWESX | -2.48 | 8.20 | 7.70 | 3,000 | 800-662-7447 |
| Vanguard LongTm Bd Idx | VBLTX | -2.78 | 8.14 | 8.27 | 3,000 | 800-662-7447 |
|
Tax-free Money Markets |
||||||
| Monarch Dly Gov Obl Univ | DGIXX | 0.88 | 1.50 | 3.16 | 1,000,000 | 800-754-8757 |
| Scudder Yield Wise Money | SYWXX | 0.71 | 1.43 | 3.16 | 25,000 | 800-621-1048 |
| Vanguard T/E Money Mkt | VMSXX | 0.86 | 1.28 | 2.22 | 3,000 | 800-662-7447 |
| Vanguard OH T/E MMkt | VOHXX | 0.86 | 1.28 | 2.23 | 3,000 | 800-662-7447 |
| Vanguard PA T/E MMkt | VPTXX | 0.83 | 1.23 | 2.17 | 3,000 | 800-662-7447 |
|
Moderate Allocation |
||||||
| Bruce | F0007Q | 62.53 | 35.69 | 27.37 | 1,000 | 800-872-7823 |
| FPA Crescent | FPACX | 18.86 | 14.75 | 11.33 | 1,500 | 800-982-4372 |
| Oakmark Equity & Inc I | OAKBX | 18.21 | 10.30 | 12.19 | 1,000 | 800-625-6275 |
| T. Rowe Price Cap Apprec | PRWCX | 20.17 | 10.26 | 11.95 | 2,500 | 800-638-5660 |
| Laudus Ros Val L/S Eq Inv | BRMIX | -0.81 | 9.79 | 5.22 | 2,500 | 800-447-3332 |
|
Muni National Intermediate |
||||||
| Harris Ins Tax-Ex Bond A | HXBZX | -0.02 | 5.96 | NA | 1,000 | 800-982-8782 |
| State Farm TxAdv Bd A | SFTAX | 0.05 | 5.91 | NA | 250 | 800-447-0740 |
| Delaware T/F USA Int A | DMUSX | 1.11 | 5.56 | 5.65 | 1,000 | 800-523-4640 |
| Eaton Vance Natl Ltd A | EXNAX | 2.00 | 5.47 | 4.74 | 1,000 | 800-225-6265 |
| First Inv Ins Int T/E A | FIITX | 5.27 | 5.99 | 1,000 | 800-423-4026. | |
| SOURCE: MORNINGSTAR INC. MORNINGSTAR MAKES EVERY EFFORT TO ENSURE THE ACCURACY OF THIS DATA, BUT CANNOT GUARANTEE IT. TOP FUNDS IN EACH CATEGORY, RANKED BY THREE-YEAR RETURNS, SINGLE SHARE CLASS, NO INSTITUTIONAL, NO QUALIFIED ACCESS, OPEN TO THE PUBLIC. RETURNS THROUGH JUNE 30, 2004. | ||||||