The forecast for mutual funds investing in equities in 2004 mirrors that for the stock market -- good, but not great. Lauren Young, personal finance editor of BusinessWeek, expects equity funds to be up 10% to 15% this year, against more than 30% for the typical fund in 2003. In reporting on BW's Mutual Fund Scoreboard, Young says she thinks larger companies will do better this year as the economy grows, and thus large-cap funds look good. A number of such funds are on the Scoreboard's A list, among them Fidelity Growth Company (FDGRX ), Fidelity Contra Fund (FCNTX ), and Thompson Plumb Growth (THPGX ).
While technology funds were the worst performers during the bear market, Young says they gained 59% in 2003, and the Scoreboard's A-rated names now include, for example, Kinetics Internet (WWWFX ), Icon Information Technology (ICTEX ), and Fidelity Select Software (FSCSX ).
These are among the points Young made in an investing chat presented Jan. 20 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Which type of funds do you think will perform the best? Do you think the large-cap funds will do better than the small caps this year? And what showed up as best in the Scoreboard BW just published?
A:In the second year of a recovery, larger companies tend to do better. Having said that, I like large-cap funds. Some good ones: Fidelity Growth Company (FDGRX ), Fidelity Contra Fund (FCNTX ), Thompson Plumb Growth (THPGX ) -- and there are a lot of other really good ones on the Scoreboard, so I'll leave it at that.
Q: What three funds from Vanguard would you recommend for the long term?
A:Well, if you really want a good core kind of all-cap fund, the Total Stock Market fund (VITSX ) would be the best core holding. But if you're looking to complement your portfolio with some other funds...Vanguard Health Care (VGHCX ) is an amazing fund. The only drawback is its $25,000 minimum. But if you're willing to cough that up, that's a great Vanguard fund.
And also, Primecap (VPMCX ) -- which is one of our A-rated funds -- is another really good Vanguard offering. There are some more Vanguard options on the Scoreboard.
Q: Should I stick with Janus Orion (JORNX )? I bought it at $10, and it's now about $6.
A:My first question would be, do you own any other Janus funds? Because there has been in the past a lot of overlap among Janus portfolios, although they've seemed to fix that more recently.
Now this fund has held everything from Berkshire Hathaway (BRK ) to Univision (UNV ), and it did very well last year. It was up more than 43% and beat its peers. So I think the question would be how is it going to work in your portfolio. It's way too concentrated to be a core holding, but I think it's worth maybe 5% to 10% of your overall fund bet.
Q: Are AIM Premier Equity fund (AVLFX ) and AIM Blue Chip fund (ABCAX ) going to be perennial losers? Should I get out of them?
A:AIM is a very earnings momentum-driven shop. So in the past few years, when companies haven't had growing earnings, their funds have not done especially well. But I do think that 2004 will be a good year for blue chips, which is why this fund might be a good one to hold. Give it one more year, and if it's still underperforming, it's time to reevaluate.
Q: What do you think of the First Eagle funds?
A:There are a couple that made our A list, including First Eagle Global (SGENX ) and First Eagle Overseas (SGOVX ). So they clearly do a good job of managing risk while delivering relatively good performance. And the lead manager, Jean Marie Eveillard, is basically a legend in the industry. So I think that in terms of an international stock picker, he's somebody who I respect and think is worth putting money with.
Q: I love health care -- are there any funds you like?
A:Well, aside from Vanguard Health Care, I think T. Rowe Price has a very solid Health Sciences fund (IRHAX ). It's not as speculative as maybe a Janus fund, but it's a good core health-care portfolio.
I don't think there were any other A-rated health-care funds on our list this year. But, for me, a good health-care manager has a lot of experience. Another one that would fit the bill there is Sam Isaly -- this fund is the Eaton Vance Worldwide Health Sciences Fund (ETHSX ). He's terrific. He's much more speculative than the T. Rowe or Vanguard [managers] and also global in nature.
Q: I want to find a fund that trades in China stocks.
A:If you want a pure-play China fund, Guinness Atkinson has a very good China & Hong Kong fund (ICHKX ). The fund manager was just sitting in our conference room about a half hour ago, so I stopped in to say hi. His name is Edmund Harriss -- he's got a great sense of the Chinese market.
The Matthews folks also run an excellent China fund. They have been in the business for a long time as well and really know their way around the market. The ticker is MCHFX. I feel, however, that even since November, the market has gotten a little frothy in Asia. So you want to be careful not to be buying in at the top. I think there's going to be some kind of short-term correction, and I would wait for that before making a major investment.
Q: Your thoughts on the Smith Barney Aggressive Growth fund (SHRAX )?
A:I like Richie Freeman, the manager of that fund, a lot. I think he has done a really good job at finding growth companies, and [the fund has] an incredible long-term record. It has a five-year annualized return of 11.3%, which puts it nearly 12 percentage points ahead of the S&P 500 for the same period. He's a buy-and-hold investor. He doesn't follow the herd mentality.
Q: Your thoughts on the Vanguard Explorer fund (VEXPX )?
A:It's a really big fund for what it's supposed to be, which is small-cap. Assets are about $7 billion. It has a multi-manager approach, however, and they seem to be very complementary to each other. It's done very well. My only concern is that it's not very flexible. I remember a friend of mine bought this fund a few years ago -- she has been very happy.
Q: What's the best way to pick an index fund? And what about the Dreyfus 500 index fund (PEOPX )?
A:Bottom line with an index fund, you want the lowest expense option possible.... You don't want loads, you don't want high expenses or fees. There are excellent choices at Vanguard, T. Rowe Price, and Fidelity. With respect to the Dreyfus fund, the expense ratio is quite low. So I think it's a fine option.
Q: What income funds are doing the best?
A:Dodge & Cox Income (DODIX ) is A-rated.... Other ones to look at: Income Fund of America (AMECX ), which is an American Funds offering -- we give it a B+, which is good, close to an A.
Q: I bought White Oak Growth (WOGSX ) after it tanked -- have made some good money. Time now to sell?
A:I would say probably not, because they invest in very growth-oriented companies. And I think, given what we feel will happen in 2004, which is the economy is going to pick up steam -- these are the kind of companies you want to be holding.
I really, really like Jim Oelschlager, who's the fund manager. He's one of the most talented tech investors around. He's a really interesting guy, too. He's in a wheelchair, and you would never know that he's disabled.
Q: Despite all the headlines about mutual-fund scandals, we've had only one question touching on that topic -- do you think more will come? And how will investors be affected?
A:Yes, more is coming. I don't think investors are going to be affected very much. Most of the improprieties have come from improperly trading fund shares. And while the headlines sound really bad, the actual monetary impact has been quite minimal.
Part Two of the fund scandal is a look at how fund families pay to play with brokerage firms. Again, I don't think the actual impact on investors will be huge, but I do think that some of the load families are going to be forced to change their commission structures -- which is a good thing because you always want to to know whether or not the person who is selling you something is on the take. But will it have a big impact on performance? Nah.
Q: Back on Janus -- your opinion on the Janus Fund (JANSX ) and Janus Twenty (JAVLX )? Would you sell?
A:I would sell one of them. And again, it's a question of what role do they have in your portfolio. I tend not to like to own a lot of funds from the same fund company, in general. Obviously, in your 401(k) you don't always get a choice.
The Janus Fund did pretty well last year -- it beat its peers. Janus Twenty is a little more volatile because it's more concentrated, but it's also closed to investors. So you should definitely hang on to a couple of shares in case you ever want to get back in again. A little trick -- hold on to one share.
Q: Investors seem to have a renewed appetite for tech -- how are tech funds doing? Any standouts?
A:I think people were surprised at how well tech has been doing. The average tech fund gained almost 59% last year -- that's pretty good. Of course, they were, I think, the worst performing category during the bear market, too.
Kinetics Internet (WWWFX ) is an A-rated fund. So are Icon Information Technology (ICTEX ) and Fidelity Select Software (FSCSX ). Those are good ones to at least start looking at. They're not going to be the funds that gain 150%, though, in any year. They're just as good at going up as they are at going down. So you're not going to get shoot-the-lights-out kind of performance, nor are you going to get creamed if the market turns.
Q: Many market forecasters see 2004 as good, but not great, compared to 2003. Would you extrapolate that to equity funds as well?
A:Yes, I would. I think we had an incredible year for funds last year, with the typical fund gaining more than 30%. That's not likely to happen again in 2004. But it should be a decent year, and to me decent is 10% to 15% returns on average.
Personally, I'm very happy with that. I've heard a lot of people talk about how there are some areas of the market that could do better. For example, energy is poised for a rebound.
Q: If you want to see the whole BW Mutual Fund Scoreboard, get the Jan. 26 issue or go to businessweek.com/investing and click on Funds. Next week, the Scoreboard will focus on bond funds. Meantime, Lauren, any final words of wisdom for mutual-fund investors?
A:Please don't chase performance.
Edited by Jack Dierdorff