Mutual Funds That Go the Distance

BW Personal Business Editor Lauren Young covers the field, with funds to suit a variety of investment goals

The typical equity mutual fund did better than the Standard & Poor's 500-stock index last year -- and also over five years, says Lauren Young, a Personal Business editor at BusinessWeek. In the current state of the market, she sees mid-cap and larger stocks as better places to be than small-caps, and with bonds the choice should be short-term funds because of potential interest rate increases.

Young, who covers mutual funds for BW, says the best fund choices for conservative investors could be names such as Dodge & Cox Income (DODIX ), plus Fundamental Investors (ANCFX ), Income Fund of America (AMECX ), and Washington Mutual (AWSHX ), all in the American family of funds. Among the growth funds, she reports that Calamos Growth (CVGRX ) does well in the screens applied by BW.

Among funds focusing on tech stocks, Young especially likes the Firsthand Technology Value fund (TVFQX ), run by Kevin Landis, who she says keeps on top of all the latest developments. She cautions, however, that since tech stocks can be volatile, investors need to be patient for good returns.

These were some of the points Young made in an investing chat presented June 15 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 full transcript is available from BW Online on AOL at keyword: BW Talk.

Q: As we near the end of first-half 2004, have mutual funds mirrored the market? And what types have done best?

A:

So far this year, in terms of what has done well, mutual funds that are very concentrated have been great -- they're also called focused funds. And I think that's emblematic of the fact that this is a stockpicker's market.

Q: Do you recommend specialty funds, like Fidelity's?

A:

I like the sector funds a lot -- if you think a sector is going to do well. They don't traditionally tend to be funds that you would hold until retirement. They're designed to be funds that you can trade in and out of.

I've been speaking to a lot of fund managers lately, and they really like the retail sector. So probably the best way to play retail right now would be the Fidelity Select Retailing (FSRPX ) portfolio. Ditto for semiconductors. Fidelity really has a lot of specialized technology portfolios.

Q: What's your fund recommendation for income over 9%?

A:

Well, my first-blush answer would be look for a good REIT fund. But I think this is probably not the best time to be getting into REITs, because higher interest rates could put a damper on their underlying portfolios.

That said, you can still get a nice yield from junk bonds. But again, they've had such a great run, chances are that they won't appreciate as much as they have in the past. So I guess this is a very long-winded way of saying I would try to construct a portfolio for income from a few different sources -- maybe a little REITs, a little high-yield, some dividend-paying stocks. I think that's probably your best bet.

Q: What are the best stock funds for a conservative, risk-averse investor?

A:

Dodge & Cox -- they've closed their stock fund (DODGX ), but the balanced fund (DODBX ) is still open and has many of the same holdings as the Dodge & Cox Stock Fund.

I also think American funds, by far as a family, have some of the most conservative yet solid stock funds -- namely, Fundamental Investors (ANCFX ), Income Fund of America (AMECX ), and Washington Mutual (AWSHX ).

Q: What drug and pharmaceutical funds do you like?

A:

Well, I feel like a broken record, but I always tell people that my favorite health-care fund is Vanguard Health Care (VGHCX ), run by Ed Owens. But the cost of entry is steep -- it's $25,000. So that's not going to be great for everyone.

That said, Eaton Vance Worldwide Health Sciences (ERHSX ) is a really good health-care fund. And T. Rowe Price Health Sciences (PRHSX ) is another solid offering.

Q: My 401(k) is going to cash out at the end of July -- I'm currently between jobs and wondering what I should do.

A:

I'm assuming by "cash out" that you're retiring, but it sounds to me like you're looking for another job. So I'm a little confused. But if you can, and you're young enough, I would roll it over to a big fund company like Fidelity.

In fact, Fidelity just launched an amazing service for people in retirement. It's free right now, but at the end of the year you'll need about $100,000 in assets to avoid any fees. What's great about the service is that they take all of your income -- your Social Security checks, your pension plan, your 401(k) -- and they help you determine how much money you need every month to live. And they give you a set amount every month. So if you can park the money in Fidelity, it will help you become a customer when you do retire.

Q: What do you think of Firsthand Technology Value fund (TVFQX )?

A:

I like the Firsthand Technology Value fund a lot. [Manager] Kevin Landis is, I think, one of the smartest tech investors. Every time I talk to him, he tells me about some new technology or product that's going to change the world as we know it.

But having said that, this is a fund that really soars when tech is doing well -- like last year, when it was up almost 75% -- and it plunges when tech is doing terribly. So I definitely wouldn't put all of my money into this fund -- maybe 5% to 10% of your portfolio should be allocated purely to tech. And you have to be willing to stick around for a long time to make money.

Q: About 30% of my mutual-fund money is in short-term bond funds (Vanguard). What do you think about bonds?

A:

Well, even Bob Auwerter, who runs Vanguard's fixed-income group, is wary about fixed income right now. That said, he is (and I agree with him) much more concerned about long-term bonds. I don't think it's going to be a stellar time for fixed income. But I think you're smart to stay in short-term debt. The Vanguard Short-Term Treasury Fund (VSFIX ) and the Vanguard Short-Term Corporate Fund (VFSTX ) are excellent offerings.

Q: Which fund would you recommend for an 18-year-old beginning an IRA with $1,000?

A:

Something aggressive, but not too crazy. I think I would pick -- this is a hard one, I'll give you a couple of choices. The Legg Mason Focus Fund (FOCTX ), which is run by Robert Hagstrom -- that's definitely one I would consider.

I think the American funds -- the Growth Fund of America (AGTHX ) is aggressive but not crazy. And then finally, if you were really aggressive, Wasatch has a new fund -- they just introduced it on May 12 -- it's called the Heritage Growth Fund (WAHGX ), and it invests in larger companies, not mega-caps, but larger companies.

I also think that it's great for an 18-year-old to be putting money into an IRA because if you look at the compounding value that you'll get in the years leading to retirement, you will be so far ahead and well on your way to living large.

Q: Do you have any figures on fund performance during 2003 -- 3, 5, 10 years? Year-to-date?

A:

Last year, the typical fund gained 33.8%, and the typical fund that invests in U.S. companies was up 33.4%, which was better than the 28.7% for the S&P 500. So that was pretty good.

Through the end of the year, the average fund also beat the S&P 500 for the five-year period. So, in both of those periods, mutual funds did very well. However, over the past 10 years, the S&P has outperformed the typical fund -- not by so much, though -- by a little bit. So overall, funds have done well in the short run, but not as well in the long run.

Q: Investing in Japan and in China -- are there funds that would work for those purposes?

A:

There are a bunch of funds that invest in Asia -- and you can actually combine them to get Japan and China in one portfolio if you want. And as an added bonus, you can get India.

One fund I would recommend is the Excelsior Pacific Asia Fund (USPAX ) -- the last time I checked, its biggest bet was Japan. Another fund that's interesting, especially just for pure China, is the Guinness Atkinson China & Hong Kong Fund (ICHKX ) -- they've been great in China.

If you just want pure Japan, there's no better fund than Fidelity Japan Smaller Companies (FJSCX ). Matthews recently launched an Asia Pacific fund (MPACX ), which has weighting in Japan, too, as well as the rest of Asia -- no India, though, as far as I can tell.

Q: The Gabelli funds are all taking it on the chin -- are Mario et al. losing their touch?

A:

Mario, Mario, Mario. He is a character, that's for sure. One Gabelli fund that I really like a lot, which is sub-advised, is the Gabelli Westwood Balanced Fund (WEBAX ). The manager, Susan Byrne, is very good. Gabelli Asset (GABAX ) is beating the market this year, not by a lot, but it's doing pretty well.

The thing about Gabelli is that he's a very activist investor, and he'll really put pressure on companies to change to be more profitable to improve. So if you like that kind of fund manager, then he's your man. Incidentally, the Gabelli Value Fund (GABVX ) is also beating the market this year. I don't think I would write them off yet.

Q: I like value funds -- what do you think of Meridian Value (MVALX )?

A:

Meridian Value is a good value fund. It's a good, solid portfolio with a reasonable expense ratio. It has done pretty well. Having said that, the manager left at the end of last year. But I think the new manager so far has been doing a good job.

So I'm always a little nervous when a fund manager leaves. But so far, so good. I think that mid-cap, which is where this fund falls, is a better place to be right now than small-cap.

Typically, small-cap markets, when they outperform, the outperformance lasts for 58 months, according to Leuthold Group in Minneapolis. This cycle has lasted at least 63 months, so we're probably existing on borrowed time at this point.

On a valuation basis, small-caps are slightly more expensive now, compared with large-caps, when you judge them on price-earnings ratios. However, they're still reasonable when you judge them on price-sales and price-book. I don't think small-caps will outperform the S&P 500 in the next year, but I still think they can perform well.

Q: Can you suggest a fund to complement T. Rowe Price Equity Income (TRFDX ), an Oakmark capital appreciation fund, and Dodge & Cox Stock (DODGX )?

A:

Well, it looks like you need some international exposure. Some good options are Dodge & Cox International (DODFX ), Tweedy Browne Global Value (TBGVX ), and I like Thornburg International (TGVAX ) -- that's just on the equity side.

If you really want to diversify, you might want to put some money in fixed income, too -- short-term. Julius Baer International Equity (BJBIX ) is another good fund.

Q: How about Vanguard Total Stock Market Index fund (VTSMX )?

A:

That's a great index fund. It's the best way to get a piece of the entire U.S. stock market, and it has low fees, which are really the hallmark of Vanguard. So that's an excellent index fund.

Q: What do you think of so-called balanced funds?

A:

I think they're good, especially for people who don't want to make a decision about fixed-income and equity allocations. Traditionally, they're pretty much 60% equity and 40% fixed income. Some will deviate from that asset allocation. But having said that, it's a good way to get exposure into different asset classes.

Q: How's the Calamos Growth fund (CVGRX )?

A:

Calamos Growth Fund is an excellent fund -- we're big fans here at BusinessWeek. They always score very well on our proprietary rankings system. It's a family affair at Calamos -- father, son, cousin -- which I think is very nice. They're good people. Smart investors.

Q: Would you bail out of Janus funds or stay the course?

A:

Well, if I had my entire portfolio in Janus, I would definitely get out of some of them -- just for diversity's sake. The thing about Janus is that there are still some very talented people there. So you just have to know how to pick and choose among the survivors.

Janus Twenty (JAVLX ), for example, which is closed -- if you owned that, I would say stick with the manager because he has been around for a long time. And when his style works, it works quite well. In addition, Janus has a few value funds that are sub-advised -- namely, the MidCap Value (JMCVX ) and the SmallCap Value (JSCVX ) -- and they are excellent funds. They are also closed. So if you get out, you'll never get back in again.

But if you own a lot of the large-cap funds, I still think you see overlap. So it might be wise to just pick one fund and stick with that.

Edited by Jack Dierdorff

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