Funds for the Long Term

Philip Edwards of S&P Select Funds looks for consistency and quality of management when making his picks

Like everyone else focused on growth stocks, mutual-fund investors have been hit hard by the tech-stock collapse. But funds have fared slightly better than the S&P 500, and a few are standouts, according to Philip Edwards, managing director of Standard & Poor's. He's responsible for the S&P Select Funds listing.

Edwards points out that the average large-cap fund was down 7% in 2000, compared to a 10% slide for the S&P 500. If you want to limit your exposure to tech, you should bear in mind that technology stocks can make up as much as 40% or more of a large-cap fund's holdings.

S&P screens mutual funds for consistency of performance and quality of management, and comes up with a list of recommended funds for the longer term. Among the current favorites are Selected American Shares, Royce Low-Priced Stock Fund, and Tocqueville Small-Cap Value Fund (up 14% last year). Edwards also mentions that the Legg Mason Value Trust Fund has beaten the S&P 500 for 10 years in a row.

These comments came in a Jan. 2 chat presented by Business Week Online and Standard & Poor's on America Online. Edwards was responding to questions from the online audience and from BW Online's Jack Dierdorff. Edited excerpts from the chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.

Q: Phil, how have mutual funds generally been doing in comparison to the overall market? Any better -- or worse?


This year, they've been better. But it's all relative in a bad market. If you look at the broad S&P 500 composite, it was down about 10% in 2000, whereas the average large-cap fund was only down about 7%.

Q: Tell us a bit about S&P Select Funds and how it works.


S&P evaluates funds looking for two things: consistency of performance and quality of management. And only those funds that pass those two hurdles receive the exclusive Select Fund designation.

Q: Which funds rate tops in S&P's screen?


Last year, large-cap growth funds were hammered. For example, Janus 20 (JANVLX ) was off 32%. But this is to be expected from aggressive technology-laden funds and isn't a reason to run away from them. It does show, however, the importance of diversifying to funds such as Alliance Growth & Income (CBBDX ) and Selected American Shares (SLASX ), as well as some small-cap funds such as Royce Low-Priced Stock Fund (RYLPX ). There's one other fund that isn't commonly known: Tocqueville Small-Cap Value (TSCVX ). They're a smaller group with a small management team. It was up 14% last year.

Q: Where is the Select Funds list available?


Wonderful question. You can get it at

Q: What are your recommendations in the technology area?


My first recommendation is to check the technology exposure in your existing funds. What a lot of people don't realize is that they already have a significant technology exposure. If you own a large-cap growth fund, it's likely that it has 40% or 50% of its assets in technology stocks. There is a global fund that is technology-oriented called New Economy fund (ANEFX ) (American A funds). There's also an Eaton Vance Information Age fund (EMIAX ) that also has a global technology perspective.

Q: My divorce was final recently. I've been given half of my ex-husband's retirement fund. Where would be the best place to invest these funds?


My first recommendation would be to contact a financial adviser. I think that it's a difficult question to answer because it depends on your age, risk tolerance, and investment needs. As a very general response, I would diversify the investments with 50% to 60% in large-cap funds, another 20% to 30% in small-cap funds, and the rest in fixed income.

Q: What do you think of index funds?


I think that for large-cap investments, index funds are a good idea. For smaller and midsized investments, active management is better.

Q: What type of fund, or fund family, looks best for the new year?


I like Capital Research, which provides the American funds. They've got a rich research team, strong portfolio managers, and consistent results. They have nine funds on our Select list.

Q: Are there bond funds that look good now?


Absolutely. The volatility in the equity markets has raised interest in bond funds. And there are several good funds on our list -- for example, Legg Mason Income Fund (LMIGX ), as well as Strong Corporate Bond Fund (STCBX ).

Q: I've read that Fidelity Income & Growth Fund (FGRIX ) may open back up. Any thoughts on this fund?


Fidelity has a tendency to rotate managers quickly, but they do have a deep bench. That's a very large fund, and you should be wary of larger funds -- you may be just as [well off] in an index fund.

Q: I'm 32. I have $5,000 for a fund for the long term -- any recommendations?


I would go with the Selected American Shares (SLASX ). That's a great fund with consistent performance. Or if you want a more aggressive take, Invesco Blue Chip Growth (FLRFX ). And when I say consistent performance, I mean over many, many years -- at least 10 years.

Q: What small-cap funds make your Select list?


On the growth side, there's Wasatch Small-Cap Growth Fund (WAAEX ), which I believe is still open, as well as Invesco Small-Cap Growth Fund (FIEGX ). And on the value side, there is Skyline Equities Fund (SKSEX ), as well as the Royce Low-Priced Stock Fund (RYLPX ).

Q: Should we get out of technology funds altogether?


I think diversification is the key. You need to have exposure to both growth and value funds as nobody has been smart enough to consistently time the market. So I wouldn't avoid technology, but I'd make sure that it's balanced in the portfolio.

Q: What is happening with the Janus group?


It's a very aggressive group -- they invest aggressively. And aggressive stocks were killed in 2000. As a result, the Janus funds aren't doing as well. It doesn't mean that people should avoid Janus. I think that the performance is understandable, given the investment style. As a matter of fact, we have three Janus funds on our list: the Janus 20 Fund (JAVLX ), the Janus Fund (JANSX ), and the Growth & Income Fund (JAGIX ). I believe that Growth & Income is still open.

Q: What about Legg Mason Value Trust?


Excellent fund. That fund has beaten the S&P 500 for 10 years in a row. Bill Miller is a strong manager, and we're very impressed with this fund.

Q: One of your list's two criteria is management. In S&P's view, who are some of the other top managers?


Some of the top managers in our view are Trent May at Invesco, Robert Gardiner at Wasatch, and Bob Turner at Turner Funds.

Q: What is your opinion on American Growth Fund of America?


Good fund. It's on our Select list. It has multiple portfolio managers, as well as a strong research team. It was one of the better growth funds in 2000, up a little over 7%, so I'm very impressed with this fund.

Q: If there is indeed a severe economic slowdown, will there be a redemption crisis for the funds?


Hard to tell. It appears to me that a longer-term investment mentality is taking hold. And while I'm sure that there will be redemptions, I'm not sure it would reach crisis proportions. However, this is a potential exposure for a firm like Janus, which had so much money flow in over the last couple of years.

Q: Is there still a net inflow into mutual funds?


I believe that it has been close to even, meaning that inflows matched outflows. There has been more [activity] in bond and money [market] funds.

Q: How do we keep fund managers true to the fund's objectives?


Good question. That's one of the things that we look for in the Select Funds. To be a Select Fund, a manager has to put your money where his mouth is. He/she has to do what they say they're going to do. Any deviation will raise concerns for us.

Q: Do you compare notes at S&P Select Funds with what other groups like Morningstar come up with?


No. That's because our Select list takes a longer-term outlook than do the Morningstars. They're based entirely on performance statistics, and as a result, have an average life of under six months. We want the Select Funds to be longer-term investments.

Edited by Edited by Jack Dierdorff

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