Mutual Funds that Make the Grade

Michael Wasserman of S&P's Select Funds Group discusses the portfolios that offer the best in performance, risk, and volatility

As with most types of investing, diversifying is the wisest approach in buying mutual funds. That's the counsel of Michael Wasserman, director of research for Standard & Poor's Select Funds Group, who suggests a balance between growth, value, and other types. However, he notes that growth funds have been doing better in the wake of the bear market.

S&P Select Funds screens hundreds of funds to come up with a list of 35 recommended names, based on such measures as performance, risk level, and volatility. Among the mutual funds on the list are Dodge & Cox Stock Fund (DODGX ) and Growth Fund of America (AGTHX ) -- part of the American funds family, a group on which S&P has a high opinion, Wasserman notes. Several bond funds also come up on the Select Funds roster, and Wasserman mentions in particular the Dodge & Cox Income fund (DODIX ), in the intermediate high-value category. As for sector funds, he cautions investors to be aware of the risks.

These were some of the points Wasserman made in an investing chat presented Aug. 19 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from this chat follow. A full transcript is available on AOL at keyword: BW Talk.

Q: To set the groundwork, brief us on the Select Funds list. How many funds are in it, and how are they selected?


The Select Fund List has 35 funds, and they're selected based on an initial screening for risk-adjusted and absolute returns, and they're sorted by style category. We look at the top one-third of the funds over a rolling three-year period.

Q: What do you think of American Growth fund?


The Growth Fund of America (AGTHX ) is on our Select Funds list in our large-cap growth category. It has been a strong performer over the long history. Year-to-date, the fund has returned 16.8%, vs. its peers at 15.7%. And its longer-term performance over three years, annualized, is -9.3%, vs. its peers at -17.2%.

Q: What's your opinion of American High Income Trust (AHITX )?


S&P overall has a very high opinion of the American funds group. This fund has returned, year-to-date, 16.3%, vs. its peers at 13.3%.... Its 10-year track record puts it in the top quartile of high-yield funds.

Q: What type of fund is doing best in the current market?


Although growth has been doing better coming out of the bear market, it's still our belief that it's most important to have a diversified portfolio with a proper balance of value and growth funds, etc., across the style categories. S&P's investment-policy committee currently recommends a portfolio with 60% equities, 25% cash, and 15% bonds.

Q: What about Capital Income Builder fund (CAIBX ) and Income Fund of America (AMECX ).


Looking at the Capital Income Builder fund , this is one fund of the American funds group on which we haven't completed a qualitative review. However, knowing the American Funds group very well, their research approach and portfolio management is the same across their entire firm. This fund appears on a performance basis to be doing well vs. its peers. The three-year track record has the fund performing at 7.8%, vs. its style peers at -1.4%.

The Income Fund of America, a U.S. balanced fund, is also performing very well. It has a lower standard deviation than its peer group and lower portfolio turnover -- at 36%, vs. its peers at 85%. The three-year performance of the fund is 6.7%, vs. its peers at -2.4%.

Q: Do you have an opinion on the Dodge & Cox Stock fund (DODGX )?


Dodge & Cox Stock Fund has been on S&P's radar screen for a while in our large-cap value category. It has an S&P overall ranking of 5-STARS [buy] for every year (one-, three-, five-, and ten-year ranking). It has a lower risk ranking than its peer group. It has proved to be a very good performer year in and year out.

Q: Please comment on the Muhlenkamp fund (MUHLX ).


This fund has had stellar performance throughout the years, with almost no portfolio turnover. But compared to its large-cap value peers, it has much higher volatility. It also appears to have gone through some changes in its style category in terms of large-cap and mid-cap. So, it probably has a mixture of capitalizations within its portfolio over a longer period of time.

Q: Would you recommend buying Vanguard Health Care (VGHAX ) at this point? How have sector funds been doing?


This fund doesn't have a long-enough history to make a comment on -- the inception date is November, 2001. But with any sector fund, it should always be part of an overall diversified portfolio. So always put that into consideration when putting a health-care or technology-specific fund into your portfolio, and know the risks associated with exposure to those types of investments.

Q: How do you view the near-term performance of Janus laggards such as Twenty (JAVLX ) and Worldwide (JAWWX )?


On the Janus Twenty fund, investors have to be aware that this is a very concentrated portfolio. Contrary to its name, it has more than 20 holdings -- it has somewhere between 30 and 35 holdings. It's a relatively high-risk, large-cap growth portfolio but has performed well in the past. But you should expect volatility when holding this fund in your overall portfolio.

The Janus Worldwide fund is also an international growth fund with moderate risk, but investors should be aware that there has been a recent manager change. One of the managers has been with the fund since 1991, but the lead manager has recently left the fund but is still involved with Janus management.

Q: Any international funds worth considering? What about Tweedy Browne Global Value ("/>)?


Templeton Foreign fund (TEMFX ) is one that S&P has reviewed both quantitatively and qualitatively. It has performed well over the three-year period, outperforming its peers over that time period. Its five-year peformance is also strong, at 3.3%, vs. its peers with -3%. Tweedy Browne Global Value fund is listed as a global fund. However, it only has 11% in U.S. stocks, but it's also holding 11% in U.S. cash, and the rest is diversified throughout Switzerland, the Netherlands, and Britain. This has a 10-year overall ranking from S&P of 5-STARS, and it has outperformed its peer group over the three-, five-, and ten-year annualized periods.

Q: Any bond funds on the S&P list? What do you think about high-yield municipal-bond funds?


We have several bond funds on our list and radar screen. One that comes to mind with strong performance in the intermediate high-quality category is the Dodge & Cox Income fund (DODIX ) -- it has an S&P ranking overall of 5-STARS. Year-to-date performance through July, 2003, is 1.87%, vs. its peers' 0.19%.

To answer the question about high-yield municipals, our group does monitor funds in the municipal-bond category, but it's not something that we keep on our Select Funds list, so that would be difficult to answer.

Q: How do you feel about Oakmark fund (OAKMX ) and Oakmark Select (OAKLX )?


Oakmark fund has done a great job in the mid-cap value category. Since 1993, they've had two years of negative peformance -- one of those years was 1999, which we all know was a growth year. The fund was down 10.5%, and, surprisingly, in 2002 the fund was down 14.4%. Year-to-date the fund has returned 11.3%, vs. its peers at 15.8%. But for an overall ranking for a three-year return, S&P has this as a 4-STAR [accumulate] fund. So the message again for the Oakmark fund is that this is a long-term hold.

The Oakmark Select fund is run very similarly to the Oakmark fund in the large-cap value category. It has performed very well -- it's a concentrated portfolio with 24 holdings. However, this has had three down years in a row -- 2000, 2001, and 2002. The difference is that this fund is outperforming its peer group over the one-, three-, and five-year periods.

Edited by Jack Dierdorff

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