Mutual funds: still going strong; a look at 1993's strongest mutual funds, and the best bets for 1994.
After a respectable, but hardly smoking, 1992 (in which the typical stock fund gained 8.9%), mutual funds bounced back in 1993. And investors made money in them, down and sideways. Overall stock funds on average soared 12.5%, besting the 10% return on the benchmark S&P 500. But that was only the beginning. Zeroes and junk, the top-performing bond funds, gained respective averages of 20.76% and 19.5%.
So what happened to lift mutual funds out of the slump of '92? Healthier corporate earnings and low-yielding CDs spurred investors into mutual funds last year, with $160.6 billion going into equity funds.
"I'm optimistic about the stock market," says Ian Quan-Soon, president of IQ Financial Services Inc. in New York City. "There's no worthy alternative to it. Right now, six-month CDs, for instance, are paying just 2% to 3%; and longer-term Treasuries pay only 4% to 5% interest, if that. So, to keep up with inflation, currently at 3%, you must have equities in your portfolio." Right now, one of the best devices for entering the stock market is mutual funds.
Here's a closer look at how mutual funds fared in 1993:
Stodgy utility funds, those dull, but dependable, growth and income vehicles, returned a shocking 13.3%. Small company growth funds, which typically invest in firms worth $500 million or less, leapt 16.9%, outperforming equity funds as a group for the third year in a row. International funds, though much-hyped, paid off handsomely, rewarding investors with 39.4%, on average. Funds that invested in the Pacific Basin or Latin America shot up even farther, gaining 63.8% or 57.1%, respectively.
What was the biggest winner for '93? Gold funds, which flat-out soared. Buying gold just to be "defensive" turned out to be the best investment you could make. After years of sub-par returns, gold funds returned an average of 81% (hard to get bugged about that). Of the 25 top-performing funds in 1993, 15 hold mainly gold. Last year even the laggards still made money. For example, sector funds specializing in biotechnology and the environment produced returns equal to the highest-yielding money funds (about 3.4%).
Nevertheless, the big question remains: Will the pyrotechnics continue in '94? Probably not, say fund advisers. Some experts believe that the stock market is due for a deflation: Overall, prices may drop, which means bargains for value investors, but a while before the fireworks go up again.
"This bull market is getting long in the tooth," says Sheldon Jacobs, editor of the No-Load Fund Investor newsletter. Pointing out that the bull is well into its fourth year, he adds, "It's the longest period in history that the market's been up without a 10% correction." Then too, particularly in light of the great gains of '93, much of the market may be overpriced.
"It's definitely a challenge to find areas in the U.S. and overseas that are real bargains," notes Mark Headley, a director of the money management firm, Litman/ Gregory, that publishes No-Load Fund Analyst. That's why experts agree on the watchword for investors in 1994: "Stay diversified."
By their very nature, most equity funds are already well-diversified because they typically invest in hundreds of stocks over several different industries. So, although there hasn't been a significant correction for some time, owning stock funds in a bear market is not necessarily bad. However, warns Jacobs, "you really shouldn't be in equities unless you've got at least a five-year time frame, about the length of a full market cycle. Since the market trends upward most of the time, eventually you'll recoup."
Because a fund can be accurately judged only by how it fares over a full market cycle, the BIACK ENTERPRISE "Top Funds For 1994" are ranked by five-year performance. We rank the top five funds by category; there are 10 categories in total. With more than 5,000 funds to choose from, where should you begin your search for value in '94?
Although some advisers complain that the bull is old and price-earning ratios are high suggesting the stock market is overvalued, "a lot of other respected advisers are bullish," says Ken Weber, president of Weber Asset Management Inc. in Great Neck, N.Y. These pros point out that interest rates and inflation are low and likely to stay that war - both very good signs for the stock market.
What's an investor to make of all this confusion? "The case can be made for a moderately bullish '94 with gains on the order of 10% to 12%," says Weber. "But this is not a year to throw caution to the wind." With that in mind, here's what else the experts advise.
A YEAR TO DIVERSIFY
Although it's true, by definition, that funds are diversified, some pros suggest that this year you might consider further diversifying the types of funds you buy. Of course, you could ante up $ 10,000 or so and invest in several funds yourself. Or, you could pick an "asset-allocation" fund that does much of the work for you. These funds invest not only in different industries but also across several classes of assets, such as domestic and international stocks, bonds and gold.
Adviser Sheldon Jacobs recommends Fidelity's three asset allocation funds (Fidelity Asset Manager, Fidelity Asset Manager: Growth, Fidelity Asset Manager: Income) and international-allocator Blanchard Global Growth. For income investors who want to spread their money around even further, Jacobs suggests T. Rowe Price Spectrum Income, which invests in six other Price income portfolios including money markets, international and high-yield bonds. "This is a very safe way to get into the more volatile bond markets," he says.
Funds that invested in so-called "emerging markets," such as Malaysia, Latin America and India, were hot in '93. But last year's winners often end up in this year's basement. Consider Lexington Strategic Investment, a gold fund up a whopping 269.8% in 1993. It was the worst performer the year before that, losing 60.7%.
Don't be tempted by glittering one-year records, says John Markese, president of the American Association of Individual Investors. "Buying last year's winners won't work. The best advice for most individuals is to get well-diversified and invest for the long term." That said, Markese, like most experts, also suggests owning international funds. If diversification is the goal, it's foolish to invest in only one (namely, the U.S.) stock market. However, given the extraordinary run-up in overseas stock prices last year, which international markets - or market niches - still hold value?
"Small-cap European companies," says Headley of Litman/Gregory.
UNDERPRICED AND OVERLOOKED
European investors typically ignore the small-cap sectors of their markets, Headley explains. This leaves many perfectly worthy stocks underpriced and overlooked. Plus, he adds, "The recession in Europe probably won't be over for some time, which makes this a good time to buy."
Headley recommends Tweedy, Browne Global Value, in spite the fact it was launched only last July and is too new to have much of a track record. "It's run by an investment firm with over 70 years of experience in the stock market, Headley explains.
These days it's nearly impossible to determine a fund's investing style from only its name or type (i.e., growth or income funds). Who would know simply from its categorization as a "growth" fund that the Janus Fund often has large percentages of its assets in cash? "And the Lindner Fund has no bonds in its name, but it sure owns a lot of them," notes Weber. Thus, at a time when it's especially important to be well diversified, don't just scour the fund's prospectus. Before you buy, carefully examine any statements offering additional information and the fund's most recent quarterly report. "You want to find out what's really in a fund before you plunk down your money," Weber explains. "You need to know what you're getting."
LOAD VS. NO-LOAD FUNDS
And you need to know what it will Cost you. Hefty expenses can eat into your returns. Nearly half of the funds on our chart are what's known as no-load funds. With a load fund, you pay a sales charge or commission to invest. For instance: $1,000 gets you $1,000 worth of no-load fund shares. But that same amount would buy only $915 worth of shares in a fund with an 8.5% load, and you'd have to gain 9.3% to break even.
Also, watch out for what's called back-end fees. So, even though you don't pay charges up front, you could get hit with fees when you take money out of your fund. This roundabout load could cost anywhere from 1% to 5% of your fund's assets.
You may not be able to swear off a load fund altogether. But to really get your money's worth, try to get a fund that charges a low-load - 3.5% or less.
Granted, some advisers expect the market will go up while others think it will head south. Don't try to time the market's peaks and troughs, and don't let let conflicting opinions about it keep you from staying the course. It doesn't pay to worry about whether the market will drop. It surely will, and just as surely it will rise again.
"There's no such thing as a good or bad time to invest," says adviser Ian Quan-Soon. "If you have a goal or concern, such as educating your children or funding your retirement, keep your horizons long and don't worry if the market is too high."
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|Title Annotation:||Hot Investment Strategies; includes Black Enterprise magazine's recommendations for 1994|
|Article Type:||Cover Story|
|Date:||Apr 1, 1994|
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