Sizing Up the Market's Next Move
So far this year, mutual funds have been "basically treading water," just like the stock market. So says Lauren Young, personal finance editor of BusinessWeek, which recently issued its midyear update on funds. The big exceptions to that rule are funds focusing on natural resources, emerging markets, and utilities.
Among the top performers Young cites are the Guinness Atkinson Global Energy (GAGEX ), the Vanguard Energy Fund (VGENX ), and the Fidelity Select Energy (FSENX ). And in the emerging markets, where she says funds investing in Latin America have done particularly well, she singles out T. Rowe Price Latin America (PRLAX ) and Merrill Lynch Latin America (MALTX ) as two of the "chart-toppers."
In the current market, Young suggests looking at large-cap growth funds, including Growth Fund of America (AGTHX ), T. Rowe Price Growth Stock (PRGFX ), Smith Barney Aggressive Growth (SHRAX ), and Marsico Growth (MGRIX ).
These were some of the points Young made in an investing chat presented June 21 by BusinessWeek Online and Standard & Poor's, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. AOL subscribers can find a complete transcript at aol.businessweek.com/chats.
Q: BW is out with its first-half report on mutual-fund performance. So in general, how have the funds been doing, relative to the broad market and its sluggishness? A:
Q: BW is out with its first-half report on mutual-fund performance. So in general, how have the funds been doing, relative to the broad market and its sluggishness?
A:They've been basically treading water -- no huge losses, but no big gains either.
Q: Have there been any exceptions? Any standouts? A:
Q: Have there been any exceptions? Any standouts?
A:Absolutely. The big exceptions really are natural-resources funds, where we have seen double-digit gains. The emerging markets continue to do well, particularly Latin America. Utilities funds are also up substantially this year.
Q: Can you give us any fund names among those good performers? A:
Q: Can you give us any fund names among those good performers?
A:Yes. Among this year's top performers are Guinness Atkinson Global Energy (GAGEX ) and Live Oak Health Sciences (LOGSX ). Another is the Vanguard Energy Fund (VGENX ). There are many to choose from. Fidelity Select Energy (FSENX ) is another.
Q: What do you think of Growth Fund of America (AGTHX ) and American EuroPacific Growth Fund (AEPGX )? A:
Q: What do you think of Growth Fund of America (AGTHX ) and American EuroPacific Growth Fund (AEPGX )?
A:They're both excellent funds. American Funds is one of my favorite fund families -- they stick to their knitting and invest in companies that reflect the name of the fund. So you find only growth stocks in Growth Fund of America. I also like their multi-manager approach. There are many different people responsible for slices of each fund, and that's a great way to keep the fund fresh.
Q: Your thoughts on Eaton Vance Worldwide Health Sciences (ETHSX ), please. A:
Q: Your thoughts on Eaton Vance Worldwide Health Sciences (ETHSX ), please.
A:I love this fund, and I feel like a broken record because I say it every time I do this chat. The manager, Sam Isaly, is one of the smartest people in the health-care group. He always knows the next big thing. It's a great fund to have in your portfolio, but probably not more than 5% to 10% because it's very sector-specific. But over the long haul, it has an attractive track record.
Q: I have Franklin Templeton Income (FKINX ) -- what's your opinion of owning mutual funds for income? A:
Q: I have Franklin Templeton Income (FKINX ) -- what's your opinion of owning mutual funds for income?
A:I've really found that you don't get a lot of income from stock mutual funds. This is mainly because even though companies have increased their dividends in recent years, the payout isn't huge.
This fund seems to do a pretty good job of offering income, particularly because it owns high yield and utilities. While Franklin Templeton Income has done well recently, I wouldn't expect that to last, given its large stake in utilities. Utilities seem to be nearing the end of their cycle.
Q: Do you recommend Vanguard funds? A:
Q: Do you recommend Vanguard funds?
A:Yes, I do recommend Vanguard funds. I'm from Philadelphia, so I always root for the hometown team. The real reason why I like Vanguard funds is what they're famous for: low-cost offerings and steady returns.
Q: Are small-cap domestic funds still looking good? A:
Q: Are small-cap domestic funds still looking good?
A:Well, they actually just had a little rally because growth stocks are doing better. But because we're already past the initial boom phase of this particular economic cycle, they probably won't continue to outperform. Small caps traditionally lead the way in an economic upturn. Most of the experts I've spoken to believe that it's time for large companies to shine.
Q: Do you recommend any precious-metals funds? A:
Q: Do you recommend any precious-metals funds?
A:I'm not a gold bug, really. These funds tend to own a lot of gold. Having said that, I really think that these funds are a play on the economy.... If I had to own one, I guess I'd go with Tocqueville Gold (TGLDX ) -- it has an outstanding five-year record.
Q: What do you think about Hartford Capital Appreciation Fund (ITHAX )? A: Q: Do you have any concern over the size of some of the American funds and others that have swollen the last few years? Will they be able to outperform the market when they're so large? A:
Q: What do you think about Hartford Capital Appreciation Fund (ITHAX )?
A:The fund is run by Wellington Management in Boston -- they're the subadviser on this fund. And they're great stockpickers as an institution, so that's a definite plus. For a large-cap blend fund, the expense ratio is pretty high. You could find a cheaper fund to own at Fidelity or Vanguard. But it seems like a pretty solid fund. It's a nice core holding.
Q: Do you have any concern over the size of some of the American funds and others that have swollen the last few years? Will they be able to outperform the market when they're so large?
A:Well, in the case of American funds, I don't even remember the last time they added a fund. They really have a very focused product line. They may have added something in the past few years, but there haven't been many. I do respect them for that.
The truth of the matter is that the funds that are really big own very liquid, blue-chip kinds of names for the most part. And because they have a multi-manager approach, you tend to get a lot of diversity. So the bottom line is, it really doesn't concern me too much.
I get more worried when small-cap funds get huge, because it's a lot harder to buy small companies in a huge portfolio and make a material difference in terms of performance. And ditto for some of the niche sector-type funds.
Q: What international smaller-companies fund gets your attention? A:
Q: What international smaller-companies fund gets your attention?
A:MFS International New Discovery (MIDAX ) is a really exciting fund. That would definitely be one I'd look at. Vanguard International Explorer (VINEX ), which is closed, if it reopened would be one to consider. One of the big benefits there is that the expenses are really low.
Expenses can be really high in international funds because it takes a lot of legwork to find the companies. Finally, one that I would keep my eye on is Driehaus International Discovery (DRIDX ). That's a neat little fund.
Q: Would you invest in a high-yield fund? If yes, which one? Do you like Franklin AGE (FHIBX )? It is a junk-bond fund, but I need the income. A:
Q: Would you invest in a high-yield fund? If yes, which one? Do you like Franklin AGE (FHIBX )? It is a junk-bond fund, but I need the income.
A:I like high-yield funds a lot. They tend to move in sync with equity markets. So when stocks are doing well, high-yield tends to do well. They've had a great run, though. This is interesting because they really did well coming out of the recession. But a lot of people are concerned that they're at the end of the line. So I would be careful.
It wouldn't be a core holding in a portfolio, but I do think they're an important part of a very well-diversified portfolio. I would just be really careful if you own other bond funds -- more core kinds of funds -- just check and see what their high-yield allocation is, because some of them have had pretty high high-yield holdings. So you want to make sure that you don't have too much overlap.
The Franklin fund is a really good fund. Just don't expect to have chart-topping performance in the months ahead. Even the manager thinks that the high-yield market is nearing the end of its run.
Q: What's your opinion about real estate mutual funds, with all the talk of the housing bubble? Alpine U.S. Real Estate Equity (EUEYX )? A:
Q: What's your opinion about real estate mutual funds, with all the talk of the housing bubble? Alpine U.S. Real Estate Equity (EUEYX )?
A:We're all really tired of real estate. I think you cannot expect the outstanding performance to continue, but I do think that real estate plays an important role in any diversified portfolio.... The volatility in REITs tends to be very low. And real estate can be a good inflation hedge. Alpine is a fantastic fund, probably one of the best.
Q: What fund would you recommend for China growth? A:
Q: What fund would you recommend for China growth?
A:I love the Matthews funds. They have a whole bunch to choose from. You can go strictly China with Matthews China (MCHFX ), but then they have a fund that's a little more diversified in Asia that invests in companies that are playing off the explosive growth in China. Basically, the whole region is benefiting from China's growth.
Q: How about index funds? And how about Vanguard 500 Index Fund (VFINX )? A:
Q: How about index funds? And how about Vanguard 500 Index Fund (VFINX )?
A:I think that's a really good fund. If you want a fund that's really reflective of the overall market, you should go with the Total Stock Market Fund (VTSMX ), since it also incorporates mid-cap and small-cap companies.
Q: Early in the chat you said emerging market funds, especially Latin America, had done well -- any names? A:
Q: Early in the chat you said emerging market funds, especially Latin America, had done well -- any names?
A:T. Rowe Price Latin America (PRLAX ) is a great fund. These funds are up about 60% this past year. I don't expect that type of growth to continue. What's currently driving that performance is the big demand for commodities, which is what you'll find being produced in Latin America -- paper, cement, all sorts of oil, etc. Commodities do well with an economic upswing, but I highly doubt that that is going to continue.
In a way, these are kind of commodities funds in disguise. The T. Rowe Price Fund has done great. Merrill Lynch Latin America (MALTX ) has done very well. Those are two of the chart toppers.
Q: There seems to be something of a boom in exchange-traded funds (ETFs) -- do you track those, too, Lauren? A:
Q: There seems to be something of a boom in exchange-traded funds (ETFs) -- do you track those, too, Lauren?
A:I do. I think that they're a really good alternative. It seems like there's a new ETF being born every day. So you can plug a lot of holes in your portfolio with ETFs. They're easier to trade than funds, and they can be quite cheap to own. So I think that they're a nice alternative.
Q: What about a fund for a 60-year-old looking for rapid growth? A:
Q: What about a fund for a 60-year-old looking for rapid growth?
A:Well, this is a great time to be buying growth funds because I really do think that they're on the cusp of exploding. I don't know if I'd necessarily be purely small-cap, but maybe a mid-cap growth fund would do the trick. Legg Mason Opportunity (LMOPX ) is a good choice in the growth group.
Now in terms of large-cap growth, where you're probably not going to get any triple-digit returns (remember those?), but you could see a nice pop in the next few years -- some of the ones I'd recommend would be the T. Rowe Price Blue Chip Growth Fund (TRBCX )...and Fidelity Contra Fund (FCNTX ) has a really good track record and a great manager. Actually, I'm a big fan of both of those fund managers.
Q: What would be the fund or funds to put money into now? A:
Q: What would be the fund or funds to put money into now?
A:Well, definitely large-cap growth. And I think Growth Fund of America is a good choice -- we talked about that earlier. T. Rowe Price Growth Stock (PRGFX ) is another. Smith Barney Aggressive Growth (SHRAX ), Marsico Growth (MGRIX ) -- these are all funds that are pretty established with veteran managers.
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