Mutual Funds: Thinking Local? Think Again
When you consider mutual funds that specialize in a region, Asia or Europe come to mind--not the Carolinas or Mississippi. But what if you want to invest in your own state or in some particular U.S. region where the economy is especially robust? No problem: You now have the option of choosing from a sizable array of funds that look for hidden value in individual states and regions (table). Standard & Poor's Micropal (like BUSINESS WEEK, a unit of The McGraw-Hill Companies) tracks 26 such funds.
But if you're thinking of investing on the home front, tread carefully: Many of the funds are small, with less than $100 million in assets, and few of them have been around long enough to establish long-term records. And over the past year, their performance hasn't exactly sparkled. Of the five regional funds that specialize in small-capitalization stocks, for instance, all lost money this year. The small-cap regional funds' average decline of 9.2% through Aug. 20 was a good deal worse than the 7.7% decline posted by the Russell 2000 index during the same period.
CHOPPY WATERS. Regional funds that primarily target mid- and large-cap companies fared even worse: The mean return of the 21 funds in that group was a loss of 3%, compared with a gain of 13.4% for the Standard & Poor's 500-stock index. But most regional funds have been hardest hit since the first quarter, reflecting the tough market climate for small- and mid-cap issues. Says S&P Micropal Senior Fund Analyst David Masters: "The first question is, `What can these funds offer me that I can't get elsewhere?"' Well, maybe not much. Masters notes that regional funds have tended to underweight the stocks of technology and financial-services companies, which have been growth engines. In addition, these local funds can get whacked if their regions' economies slow abruptly.
Still, some funds may be worth a look. Laura Lallos, a senior analyst at Morningstar, likes Franklin CA Growth I, which specializes in California companies. One of the larger regional funds, with about $705 million in assets, it has a three-year average annualized return of 17.2%. Reflecting California's vibrant technology sector, the fund has among its top holdings Cisco Systems, whose stock has more than doubled since late 1997, and Computer Sciences, which has gone up some 50% since yearend 1997. Despite these investments, the fund is down nearly 0.5% this year as other holdings, including BankAmerica, Mattel, and Chevron, have hit choppy water.
HOME TRUTH. Sun Belt fans might check out Morgan Keegan Southern Capital in Memphis. Although it has managed only a 1% year-to-date return, it's still up 8% over the past 12 months and 20.1% annually for the past three years. With $90 million in assets, the fund targets companies including WorldCom, the Jackson (Miss.) telecom giant, and retailers including Proffitt's in Birmingham, Ala.--whose shares have taken a hit lately--and Atlanta's Home Depot. Nonetheless, portfolio manager Elkan Scheidt notes that the South offers strong companies--and who better to pick them than a guy who spends his time focused on his backyard?
That's the pitch with funds that follow the companies that you might read about in your local paper every day--"investing in what you know better than the guys in New York because you're right there," says Lallos of Morningstar. But so far, she adds, "I don't think any of the funds have overwhelmingly proved that." For the most part, investing state-by-state isn't as safe a bet as the tried-and-true method of assembling a more diversified portfolio.
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