Shooting for Big Returns.
Just as Mitchell keeps a full set of clubs in her bag to help her wherever her ball happens to land, smart investors are following a similar tack--investing in a varied assortment of mutual funds so they can reap huge returns despite different market conditions. Some funds boomed while others bombed in the first half of 2001. Moreover, this year's leaders were the dogs that many investors spurned just a few years ago.
A SIX-MONTH LOOK AT THE MARKET
There were many losers. Overall, the first half of 2001 was quite dismal for stock market investors. The Standard & Poor's 500 (the index pros use as a benchmark for the U.S. stock market) lost nearly 7%, This came on top of a 9% loss in 2000. The blue chip-focused Dow Jones industrial average lost less ground, but the Nasdaq composite index, dominated by technology stocks, suffered a double-digit decline.
Many mutual fund investors felt the pain. The average domestic equity fund lost more than 6% in the first six months of the year, according to Morningstar Inc., the Chicago-based mutual fund research firm. The big-company growth funds that led the way in the 1990s lost nearly 16% in the first half, while specialized technology funds lost more than 26%. Some specialized funds that did well in 2000, those focusing on healthcare, natural resources, and financial services, produced mediocre to poor results. And investing overseas didn't help: The average foreign stock fund lost more than 14%, dragged down by weakness in European markets. (For the midyear performance of funds managed by African American asset managers, see B.E. Black Fund Watch in this issue's Money-wise section.)
There were a few winners, however. Some rays of hope broke the first half gloom. "While high-priced technology stocks continued to fall, which hurt growth funds, value stocks did relatively better," says Christine Benz, a senior analyst at Morningstar. "At the same time, the stocks of small companies outperformed those of large companies. Small banks, manufacturers, and cyclical companies did particularly well, so mutual funds holding those types of companies had good returns in the first half of 2001."
Morningstar divides mutual funds that hold a diversified portfolio of U.S. stocks into nine categories. (To evaluate the different types of funds, log on to www.blackenterprise.com this month.) In the first half of 2001, "small value" funds were up roughly 13%, bringing the 12-month return for this category to more than 25%--a good year by any standard, but especially so during a period when the broad U.S. stock market was clawed by the proverbial bear. Generally, small-company funds topped the funds that invested in the blue chips while value funds trumped growth funds.
In other words, the market has done a 180-degree turn in a three-year period. Back in 1998, Morningstar's small value category lost slightly more than 5%, while large growth funds topped the charts, returning more than 33% for the year. Technology funds, which gained 54% in 1998 and an amazing 137% in 1999, lost 33% in 2000 before dropping a further 26% in the first half of 2001, as mentioned.
Other specialized funds have seen similar reversals. Precious metals funds, which lost money during the booming 1990s, posted a 13% gain in the first half of 2001. "That gain probably was the result of investors becoming defensive with their money," says Benz. "The price of gold really hasn't moved up. However, if the world economy falls into recession and stocks continue to slide, precious metals might be a safe haven."
Real estate funds had a decent first half, too, returning more than 8%, on top of a gain of more than 26% in 2000. But real estate funds lost money in 1998 and 1999, so they're still on the rebound. "The move to value stocks has helped real estate funds," says Benz. "In addition, real estate stocks offer relatively high yields and a way to participate in an economic recovery."
SCORING WITH EQUITIES
Mitchell, who recently retired after 35 years with a local phone company (now Verizon), believes in stocks so much that her portfolio is 100% invested in equities, mainly stock funds. The conventional wisdom is that retirees should turn conservative, with a healthy allocation of their portfolios to bonds and bond funds, but "she's a very young retiree, in her early 50s," maintains Mitchell's advisor, Charlene D. Monts, an assistant vice president and senior financial advisor in the private client group at Merrill Lynch in Baltimore. "We must plan on a long retirement. She'll need growth in her investments to maintain a comfortable lifestyle, and stocks are likely to provide long-term growth."
Mitchell passed up a pension and rolled over all of her retirement funds into an IRA, which is currently invested in five equity funds: AIM Blue Chip, AIM Value, AIM Weingarten, American Funds Growth, and Washington Mutual Investors. "Her portfolio is fairly evenly divided among those funds," says Monts, "with slightly more in Washington Mutual, which has a strong record going back nearly 50 years. These are funds that invest in high-quality companies, growth and value, so Marcia has a portfolio designed to keep her from losing sleep. We don't anticipate any changes in the near future, even if the stock market remains volatile."
Some investors are pursuing a similar strategy, counting on long-term gains from the equity markets even though their advisors would recommend a little more caution. "My wife, D'Ann, and I invest mainly in individual stocks and stock funds," says Derrick Snearl, a programmer-analyst at the Los Angeles Department of Water and Power. "At 37, I feel I'm young enough to be aggressive with our own funds and the money we're investing for our two young children, ages 2 and 6."
The market's recent turmoil has reduced Snearl's appetite for buying individual stocks, he says, but he still favors aggressive growth funds such as Janus Twenty, where he invests $350 each month. "The price of that fund has come down," he says, "so my monthly statements show that I'm buying more shares. Long-term, I expect that to pay off." At work, Snearl has a deferred compensation plan that permits him to channel money into stock funds such as Janus Olympus, RS Emerging Growth, and American Funds' Growth Fund of America--three growth funds--and Vanguard 500 Index, a fund with a substantial weighting in financial services and technology stocks. "I'll probably keep putting money into these funds unless something drastic happens in the market," he says.
Snearl's financial planner, Percy E. Bolton of Pasadena, wishes that this client were a tad more conservative. "A 20% allocation to bonds or bond funds probably would be appropriate," he says. "Bond funds can help you avoid losses when stocks are weak, which has been the case recently." He favors the Fremont Bond Fund and Columbia Fixed-Income Securities, both of which are well balanced and well managed, in his opinion.
B.E.'s Top Mutual Fund Performers Y-T-D TOTAL FUND NAME TICKER RETURN(*) Large ([dagger])Fidelity Growth Adv Lev Co Stk A FLSAX 6.84 Hussman Strategic Growth HSGFX 4.81 Smith Barney Aggr Growth A SHRAX 3.66 Potomac OTC/Short POTSX 2.46 Fidelity Export & Multinational FEXPX 1.84 Mid-Cap Needham Growth NEEGX 18.13 Growth ([dagger])Heritage Mid Cap Stock A HMCAX 12.44 Strong Discovery STDIX 9.76 Westcore Select WTSLX 9.29 ([dagger])Goldman Sachs Growth Opp A GGOAX 8.97 Small Kinetics Small Cap Growth Opp KSCOX 25.36 Perkins Opp POFDX 24.11 ([dagger])J Hancock Small Cap Val A SPVAX 22.36 Buffalo Small Cap BUFSX 21.26 ([dagger])Dreyfus Prem Micro-Cap Growth A DPMGX 20.6 Large Fidelity Select Blend Leisure FDLSX 13.12 ProFunds UltraBear Inv URPIX 12.12 Grizzly Short Fund GRZZX 11.29 Rydex Leisure Inv RYLIX 10.73 Thompson Plumb Growth THPGX 8.83 Mid-Cap Legg Mason Opp Prim LMOPX 17.72 Blend Eagle Growth EGRWX 17.66 StockCar Stocks SCARX 16.64 Index Turner Midcap Val CCEVX 12.03 INVESCO Leisure Inv FLISX 11.77 Small Wasatch Core Growth WGROX 31.84 Blend FBR Small Cap Val A FBRVX 29.52 SAFECO Growth Opp SAFGX 26.15 Liberty Acorn USA Z AUSAX 26.04 CGM Focus CGMFX 25.95 Large ([dagger])J Hancock Value Focused Rel Val A JFVAX 29.16 Masters' Select Val MSVFX 19.23 ([dagger])Merrill Lynch Mid Cap Val D MDRFX 17.95 Dean Large Cap Val A DALCX 15.57 Memorial Val Equity Inst MVEIX 15.26 Mid-Cap Columbia Value Strategic Val CSVFX 24.4 Meyers Pride Val MYPVX 21.73 Olstein Financial Alert Adv OFAFX 20.42 TCW Galileo Val Opp N TGVNX 20.11 Marshall Mid-Cap Val Adv MVEAX 17.61 Small Boston Part Sm Cap Value Val II Inv BPSCX 40.46 Franklin MicroCap Val A FRMCX 34.46 Perritt Micro Cap Opp PRCGX 33.8 Aegis Val AVALX 30.31 Turner Small Cap Val TCSVX 28.71 Foreign Longleaf Part Intl LLINX 15.67 Stock Oakmark Int Small Cap I OAKEX 6.92 First Eagle SoGen Overseas A SGOVX 5.52 Tweedy, Browne Global Val TBGVX 2.35 Oakmark Intl I OAKIX 0.39 World RS Parts RSPFX 21.37 Stock Oakmark Global I OAKGX 14.94 ([dagger])Mutual Discovery A TEDIX 6.25 RS Contrarian RSCOX 3.26 ([dagger])Van Kampen Tx Mgd Glo Fran A VGFAX 0.54 Domestic Boston Part Long/ Hybrid Short Eq Inv BPLEX 14.36 Oakmark Equity & Income I OAKBX 12.53 Bruce BRUFX 10.95 EquiTrust Mgd FBMGX 8.17 Rydex Arktos Inv RYAIX 7.1 U.S. Pauze U.S. Govt Ltd Govern- Duration PGTRX 12.89 ment Maxus Income Inv MXSFX 8.83 Funds Vanguard Infl- Protected Secs VIPSX 6.39 Franklin Strategic Mortgage FSMIX 3.83 Amer Cent Tgt Mat 2010 Inv BTTNX 0.08 Muni ([dagger])Nuveen High Natio- Yld Muni Bond R NHMRX 6.97 nals Victory Nat Muni Bond A VNMAX 3.31 SAFECO Muni Bond SFCOX 3.02 Harris Insight Tax-Ex Bond N HXBAX 2.95 ([dagger])Eaton Vance Muni Bond Inst EVMBX 2.25 AVG. ANNUALIZED TOTAL RETURN FUND NAME 1-YEAR 3-YEAR 5-YEAR Large ([dagger])Fidelity Growth Adv Lev Co Stk A N/A N/A N/A Hussman Strategic Growth N/A N/A N/A Smith Barney Aggr Growth A 0.63% 34.72% 29.85% Potomac OTC/Short 45.07 -28.66 N/A Fidelity Export & Multinational -1.46 15.78 22.27 Mid-Cap Needham Growth 1.55 35.02 27.62 Growth ([dagger])Heritage Mid Cap Stock A 18.66 20.35 N/A Strong Discovery 2.42 6.07 8.08 Westcore Select -0.12 N/A N/A ([dagger])Goldman Sachs Growth Opp A 16.99 N/A N/A Small Kinetics Small Cap Growth Opp 36.53 N/A N/A Perkins Opp -8.79 -1.25 31.41 ([dagger])J Hancock Small Cap Val A 2.09 29.43 23.93 Buffalo Small Cap -32.01 30.59 N/A ([dagger])Dreyfus Prem Micro-Cap Growth A N/A N/A N/A Large Fidelity Select Blend Leisure -3.97 8.31 16.72 ProFunds UltraBear Inv 38.45 -8.76 N/A Grizzly Short Fund 41.33 N/A N/A Rydex Leisure Inv -6.51 0.64 N/A Thompson Plumb Growth 32.21 15.77 22.47 Mid-Cap Legg Mason Opp Prim 11.5 N/A N/A Blend Eagle Growth 40.02 8.4 10.67 StockCar Stocks Index 25.17 N/A N/A Turner Midcap Val 20.65 6.37 11.27 INVESCO Leisure Inv 9.47 22.93 22.2 Small Wasatch Core Growth 67.2 26.0 23.86 Blend FBR Small Cap Val A 12.12 10.45 N/A SAFECO Growth Opp 23.34 3.44 16.73 Liberty Acorn USA Z 36.68 9.5 N/A CGM Focus 81.6 23.72 N/A Large ([dagger])J Hancock Value Focused Rel Val A N/A N/A N/A Masters' Select Val 24.6 N/A N/A ([dagger])Merrill Lynch Mid Cap Val D 35.73 12.28 15.34 Dean Large Cap Val A 25.64 4.61 N/A Memorial Val Equity Inst 35.58 4.56 N/A Mid-Cap Columbia Value Strategic Val N/A N/A N/A Meyers Pride Val 21.43% 17.15% 19.08% Olstein Financial Alert Adv 26.83 N/A N/A TCW Galileo Val Opp N N/A N/A N/A Marshall Mid-Cap Val Adv 44.25 N/A N/A Small Boston Part Sm Cap Value Val II Inv 72.08 20.7 N/A Franklin MicroCap Val A 41.32 7.24 12.9 Perritt Micro Cap Opp 13.68 7.68 8.7 Aegis Val 35.15 18.56 N/A Turner Small Cap Val 38.52 19.28 19.9 Foreign Longleaf Part Intl 29.6 N/A N/A Stock Oakmark Int Small Cap I 1.6 16.84 6.4 First Eagle SoGen Overseas A 7.61 11.11 10.19 Tweedy, Browne Global Val 8.74 11.23 15.48 Oakmark Intl I 5.68 13.28 9.88 World RS Parts 45.98 7.24 9.16 Stock Oakmark Global I 28.02 N/A N/A ([dagger])Mutual Discovery A 11.71 9.62 N/A RS Contrarian 6.65 5.31 -4.75 ([dagger])Van Kampen Tx Mgd Glo Fran A 15.36 N/A N/A Domestic Boston Part Long/ Hybrid Short Eq Inv 52.29 N/A N/A Oakmark Equity & Income I 29.43 14.41 17.23 Bruce 32.28 5.11 9.85 EquiTrust Mgd 27.9 4.8 6.13 Rydex Arktos Inv 56.58 N/A N/A U.S. Pauze U.S. Govt Ltd Govern- Duration 21.59 4.39 6.44 ment Maxus Income Inv 13.24 6.23 7.67 Funds Vanguard Infl- 12.57 N/A N/A Protected Secs Franklin Strategic Mortgage 12.07 7.06 7.78 Amer Cent Tgt Mat 2010 Inv 13.24 5.03 8.9 Muni ([dagger])Nuveen High Natio- Yld Muni Bond R 11.57 N/A N/A nals Victory Nat Muni Bond A 11.18 5.87 6.68 SAFECO Muni Bond 11.27 4.46 6.49 Harris Insight Tax-Ex Bond N 11.78 5.17 5.77 ([dagger])Eaton Vance Muni Bond Inst 12.19 3.72 6.87 MIN. ASSETS(*) INIT. (in FUND NAME PHONE INVEST. millions) Large ([dagger])Fidelity Growth Adv Lev Co Stk A 800-522-7297 $2,500 0.76 Hussman Strategic Growth 800-487-7626 1,000 20.26 Smith Barney Aggr Growth A 800-451-2010 1,000 2,075.37 Potomac OTC/Short 800-851-0511 10,000 3.31 Fidelity Export & Multinational 800-343-3548 2,500 537.02 Mid-Cap Needham Growth 800-625-7071 5,000 275.15 Growth ([dagger])Heritage Mid Cap Stock A 800-421-4184 1,000 38.33 Strong Discovery 800-368-1030 2,500 170.45 Westcore Select 800-392-2673 2,500 32.09 ([dagger])Goldman Sachs Growth Opp A 800-526-7384 1,000 430.42 Small Kinetics Small Cap Growth Opp 800-930-3828 1,000 4.49 Perkins Opp 800-998-3190 2,500 31.41 ([dagger])J Hancock Small Cap Val A 800-225-5291 1,000 444.38 Buffalo Small Cap 800-492-8332 2,500 53.44 ([dagger])Dreyfus Prem Micro-Cap Growth A 800-782-6620 1,000 15.18 Large Fidelity Select Blend Leisure 800-343-3548 2,500 301.67 ProFunds UltraBear Inv 888-776-3637 15,000 24.91 Grizzly Short Fund 800-273-6886 10,000 4.94 Rydex Leisure Inv 800-820-0888 25,000 18.12 Thompson Plumb Growth 800-999-0887 1,000 127.47 Mid-Cap Legg Mason Opp Prim 800-577-8589 1,000 1,692.61 Blend Eagle Growth 800-525-6201 500 3.8 StockCar Stocks Index 800-494-2755 250 4.42 Turner Midcap Val 800-224-6312 2,500 46.56 INVESCO Leisure Inv 800-525-8085 1,000 770.85 Small Wasatch Core Growth 800-551-1700 2,000 1,098.21 Blend FBR Small Cap Val A 888-888-0025 2,000 9.44 SAFECO Growth Opp 800-624-5711 2,500 871.68 Liberty Acorn USA Z 800-322-2847 1,000 257.85 CGM Focus 800-345-4048 2,500 100.11 Large ([dagger])J Hancock Value Focused Rel Val A 800-225-5291 1,000 13.03 Masters' Select Val 800-960-0188 5,000 143.13 ([dagger])Merrill Lynch Mid Cap Val D 888-654-6837 1,000 11.77 Dean Large Cap Val A 800-268-4007 1,000 15.86 Memorial Val Equity Inst 888-263-5593 2,000 14.67 Mid-Cap Columbia Value Strategic Val 800-547-1707 $1,000 68.62 Meyers Pride Val 800-410-3337 1,000 14.34 Olstein Financial Alert Adv 800-799-2113 1,000 30.04 TCW Galileo Val Opp N 800-386-3829 2,000 36.04 Marshall Mid-Cap Val Adv 800-236-8560 500 2.12 Small Boston Part Sm Cap Value Val II Inv 888-261-4073 2,500 103.45 Franklin MicroCap Val A 800-342-5236 1,000 217.96 Perritt Micro Cap Opp 800-332-3133 1,000 10.87 Aegis Val 800-528-3780 10,000 6.18 Turner Small Cap Val 800-224-6312 2,500 117.78 Foreign Longleaf Part Intl 800-445-9469 10,000 685.43 Stock Oakmark Int Small Cap I 800-625-6275 1,000 103.72 First Eagle SoGen Overseas A 800-334-2143 1,000 412.4 Tweedy, Browne Global Val 800-432-4789 2,500 3,834.49 Oakmark Intl I 800-625-6275 1,000 844.86 World RS Parts 800-766-3863 5,000 109.01 Stock Oakmark Global I 800-625-6275 1,000 39.96 ([dagger])Mutual Discovery A 800-342-5236 1,000 933.91 RS Contrarian 800-766-3863 5,000 85.38 ([dagger])Van Kampen Tx Mgd Glo Fran A 800-421-5666 1,000 15.8 Domestic Boston Part Long/ Hybrid Short Eq Inv 888-261-4073 2,500 7.66 Oakmark Equity & Income I 800-625-6275 1,000 204.84 Bruce 800-872-7823 1,000 3.29 EquiTrust Mgd 877-860-2904 250 35.99 Rydex Arktos Inv 800-820-0888 25,000 53.67 U.S. Pauze U.S. Govt Ltd Govern- Duration 800-327-7170 25,000 45.85 ment Maxus Income Inv 800-446-2987 1,000 37.81 Funds Vanguard Infl- 800-662-7447 3,000 295.02 Protected Secs Franklin Strategic Mortgage 800-342-5236 1,000 137.46 Amer Cent Tgt Mat 2010 Inv 800-345-2021 2,500 271.00 Muni ([dagger])Nuveen High Natio- Yld Muni Bond R 800-257-8787 3,000 2.92 nals Victory Nat Muni Bond A 800-539-3863 500 49.33 SAFECO Muni Bond 800-624-5711 2,500 527.29 Harris Insight Tax-Ex Bond N 800-982-8782 1,000 1.17 ([dagger])Eaton Vance Muni Bond Inst 800-225-6265 250,000 85.63
Bolton recently revised his model portfolios, advising clients to spread their risks even more on the equity side. "Now," he says, "we not only recommend growth and value funds, we also tell investors to put money into blended (core) funds, which combine growth and value stocks. In addition to having some of your money managed by specialists, you should have generalists investing for you. Dreyfus Appreciation is a large-cap core fund that we like, for example."
Investors tend to focus too much on past performance when selecting funds, according to Bolton. "Stability of management is just as important," he says. "Why buy a fund that has done well if the manager who produced that record has left? You also should look for funds that are tax-efficient, if you're investing outside of a retirement account."
The funds Bolton prefers are those that are available, at no fee, through the mutual fund supermarkets offered by Schwab, Fidelity, and TD Waterhouse. "If you buy, funds that have minimum investments of $5,000 or less," he says, "you can have a portfolio of eight mutual funds with as little as $40,000 to invest."
DRIVING THROUGH DIVERSIFICATION
But others find safety and consistent returns through the development of a diversified mutual fund portfolio. While stock funds had their ups and downs in the first half, most bond funds posted small gains (up to 4%), a result that pleased Frederick and Cecelia Carter of Westerville, Ohio. "We had about 60% of our investment assets in bond funds," says Fred, president of Carter Raynes Claims Service, an insurance adjustment agency. "We lost some money on our stock funds but our bond funds gained, so we weren't hit too hard."
The Carters, who have been tilting toward bonds since 1998 on the advice of their financial advisor, Bill Harris of Asset Dynamics in Toledo, Ohio, are considering a dramatic restructuring--a move to 60% in stock funds and 40% in bond funds. "That's what Bill has suggested and I'm inclined to go along," Fred says. "Stock funds may be ready to move up."
The Carters, who are investing to build up education funds for their three children, ages 11 to 18, as well as for their own retirement, truly believe in a diversified portfolio. "We invest in more than a dozen funds, in several categories," says Fred. "We have domestic and international funds, small-caps and large-caps, fixed-income as well as stock funds."
Among their holdings are BlackRock Large Cap Growth Equity, LSV Value Equity, Nicholas-Applegate Small Cap Growth, and Artisan Small Cap Value. On the fixed-income side, their funds include BlackRock Core Bond Total Return Portfolio and Baird Core Bond Investors. "With this type of portfolio," says Fred, "we can take risks with some of our money while cushioning those risks with other funds."
Back in 1998, the risks seemed to lie with high-priced growth stocks, especially technology stocks. "I advised my clients, including the Carters, to take some profits and put more money into bonds, which seemed undervalued then," says Harris. "Now, stocks are down and the economy is likely to improve, after six interest rate cuts by the Federal Reserve. An improving economy should help the stock market to rally, so I'm recommending more equity funds in clients' portfolios."
Even though he's upbeat, Harris is not telling clients to bet all their chips on a comeback by tech or growth funds. "Instead of 40% in equity funds, I might suggest a 60% allocation," he says. "It's necessary to keep a balance by investing in funds that are not correlated with each other." That is, small value funds don't rise and fall in sync with large growth funds. If one fund category runs into hard times, another probably will provide positive returns.
James McQuirter, too, believes in casting a wide net. "I usually own between 10 and 15 funds," says McQuirter, who lives in Dallas and retired two years ago from IBM, where he was a technical support manager. "My wife, Ardath, and I live on my IBM pension now, but we also have a mutual fund portfolio to provide future growth."
Investors need to consider such moves. After the results of the past year, mutual fund investors may be willing to sacrifice a little offense in order to strengthen their defense now that the bears have come out of hibernation.
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|Title Annotation:||mutual fund numbers|
|Author:||Korn, Donald Jay|
|Date:||Oct 1, 2001|
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