It wasn't the best of times for the stock market, but mutual funds specializing in small- and mid-cap stocks actually showed positive returns in the first half of 2001. That's the report from Philip Edwards, managing director of Standard & Poor's Select Funds Group, which lists 35 funds that outshine the rest.
On a broader front, Edwards thinks better news may be on the horizon for the market. And, perhaps surprisingly, he suggests that investors might take another look at large-cap growth funds instead of chasing the best current returns. Large-growth is a sector that has been down, and, in a recovery, he says it could be a place for better returns.
Among fund families, Edwards says the American funds show up most often on S&P's list. He made these and many more comments on mutual funds in a chat presented July 24 by BusinessWeek Online and Standard & Poor's on America Online. He was replying to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from the chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.
Q: The stock market took a bath again today. Before we get into mutual funds, do you think things will take a turn for the better any time soon?
A:Well, we recently took a look at the market's performance after interest-rate cuts and found that, on average, six months after the last cut, the S&P 500 gained 11%. So there may be some good news on the horizon.
Q: That's interesting. Now that the first half is behind us, did mutual funds do any better than the market as a whole?
A:The value sectors have done well, especially the mid- and small-cap value sectors. They actually showed positive returns. Small-cap value funds year to date are up 13%.
Q: Is that better than the small-cap index at S&P?
A:Yes. The S&P 600 Value is up 11.8% year to date.
Q: Among the small- and mid-cap value funds in S&P's Select Funds group, what are some of the most "select"?
A:In the mid-cap value funds, there's Dreyfus Midcap Value (DMCVX ), and on the small-cap value side, there are two: the Ariel Fund (ARGFX ) and then Royce Pennsylvania Mutual (PENNX ). These are great funds.
Q: Did any sector funds do well?
A:The gold funds have done well -- and that's about the only sector that has had its head above water.
Q: Among the international funds, what does S&P rate best?
A:We like the Artisan International Fund (ARTIX ) and EuroPacific Growth Fund (AEPGX ). There's also a value-oriented international fund named Pilgrim International Value (NIVAX ) that provides a little bit of a different angle on international investing.
Q: Are technology funds still way down?
A:Oh, yes. The technology sector, year-to-date, is off 22%, after being off 40% in 2000.
Q: What growth funds look best to S&P Select?
A:There's Harbor Capital Appreciation Fund (HACAX ). It's a more aggressive offering....If you want a fund that's less aggressive, but still growth-oriented, Alleghany/Chicago Growth & Income (CHTIX ) is a good fund to look at.
Q: What would be your one single choice for a core large-cap no-load blend fund in a tax-sheltered account?
A:SSGA Growth & Income. (SSGWX ) It's an undiscovered gem...that fund year-to-date is off about 5.5%, which is better than the S&P 500. It's run by a gentleman named Emerson Tuttle, and he has decades of experience in the industry. It's run in just a typical core fashion, always fully invested. The returns are consistently strong. You're never going to find it at the top of this list, but you're never going to find it at the bottom, either. It just runs consistently well.
Q: How many funds does S&P rank in its Select Funds Group?
A:Well, we currently award 35 funds. We've recently brought that down, because we feel investors would appreciate a tighter, more focused list from which to choose. The list of funds can be found at: www.StandardandPoors.com/onfunds.
Q: What do you think of Dodge & Cox Stock Fund?
A:It has been fantastic in performance, ranking among the best. Its year-to-date returns are up 8%, while its benchmark is down 2%. So it has performed consistently well, and the management team has been around since 1965. So it's a winner.
Q: In this flat -- at best -- stock market, has there been a significant increase in fund redemptions?
A:Oh, yes. In the first six months of last year, people put $200 billion into the equity market. This year, to date, the number is closer to $37 billion. So the amount of redemptions has increased significantly, almost offsetting the new sales.
Q: Do you think indexing is a valid strategy? None of your funds are index funds.
A:Indexing is a valid strategy. However, a combination of active management and indexing can provide some diversity. We don't rate index funds because we don't think that their ratings would add value.
Q: Can you make any generalizations about the fund-management strategy that has worked best in this difficult market?
A:Conservative. A conservative strategy has worked best, one that has focused on real companies with real earnings. That's why value funds have done relatively well.
Q: Is it time yet to get back into the large-cap growth group?
A:Great question. Yes, I think it is time. Many people simply chase what's providing the best current returns. I think you need to look at what's down and invest there. And large-cap growth is certainly down.
Q: So does your list give us any help among large-cap growth funds?
A:Sure does. Janus Growth & Income (JAGIX ) is a less aggressive Janus fund and manages risk through a diverse portfolio of over 100 holdings. Growth Fund of America (AGTHX ), while large, is managed by an extremely experienced team, and is now available in no-load shares.
Q: How should an investor make use of your list?
A:...What we have built with the Select Funds is a group of funds with a diverse range of styles, running from aggressive to more conservative. And what we suggest is a combination of those funds through an asset allocation designed to achieve diversity. We're putting some model portfolios up on the Web site to demonstrate an asset allocation of the funds.... This list should provide a good foundation for putting together a portfolio of funds -- a portfolio that meets almost everyone's needs.
Q: What fund families show up most often on the list?
A:The American funds. It's just a tremendously strong fund sponsor.
Q: What about familiar names like Fidelity and T. Rowe Price?
A:T. Rowe Price is represented on our list with the Mid-Cap Growth Fund (RPMGX ). Fidelity is not, because they don't make their managers available for interviews. We feel we need to speak to the managers before we can gain confidence in a fund.
Q: How long should an investor wait before selling or switching if a fund is losing ground? What should be the criteria?
A:We usually start asking ourselves that question after 18 months of consistent underperformance. If the underperformance persists for 24 months, then we've got to have a really good reason to hang on to the fund.... We recently had two State Street Research funds dropped for this reason. We try to be patient, but even patience has its limits.
Q: What about bond funds? Any picks there?
A:Yes. There are two here: SteinRoe Intermediate Bond fund (SRBFX ), as well as Legg Mason Investment Grade fund (LMIGX ). Both of these are solid investment-grade bond funds.
Edited by Jack Dierdorff