Printer Friendly

the great fund round up.

This year, you can profit by spotting Grade A investments, and avoiding bum steers

GUY MANNING SR. KNOWS A PRIME CUT WHEN HE SEES IT. THE BASKETBALL-PLAYER-CUM-CATTLE rancher also knows a thing or two about top-grade investments. In a stock market that has bucked as hard as the orneriest bronco, the Oakwood, Texas, cowboy developed a rock-solid strategy: corralling a diversified mix of mutual funds that can ride out the peaks and dips in the market.

The virtues of such diversification have not been lost on Manning, who recalls his days with the NBA's Baltimore Bullets and St. Louis Hawks, when salaries were a notch or two below today's levels. "I grew up on a farm in Oakwood," he says, "so whenever I saved a few dollars, I'd buy 25 or 50 acres there. Then I went to work for the phone company and kept putting my money into farmland and mutual funds. By the time I was offered an early retirement package, I was ready to be a cattle rancher."

Manning, who now owns nearly 1,000 acres, raises beef cattle and supplements his income through oil leases. Therefore, his financial success is dependent on commodity prices. And his mutual fund strategy is critical. "I want to get a better return than I'd get from a bank account," he says, "without taking a lot of risk with this money."

To achieve this goal, Manning's financial planner, Matthew Reading of Austin, Texas, has helped him design a balanced portfolio. "For growth," Reading says, "I suggest the QQQ." That's the ticker symbol for Nasdaq 100 Shares, a fund that trades like a stock on the American Stock Exchange, tracking the Nasdaq 100 index, which is heavily weighted in technology stocks. This fund soared in 1998 and 1999, but stumbled last year, when tech fell out of favor.

"For balance," says Reading, "Guy's portfolio holds Vanguard Value Index Fund (VIVAX), which holds the low-priced value stocks in the [Standard & Poor's 500-stock index]." Like most index funds (especially Vanguard index funds), it is a low-cost, tax-efficient fund because the managers do relatively little trading.

Manning's approach will be the one that herds of investors will need to employ to achieve double-digit gains in the years ahead.

* GROWTH INVESTORS SEARCH FOR A BONANZA

What a difference a year can make. After 1999, investors who went into "growth" mutual funds, vehicles that had explosive earnings prospects, were gloating. Specialized technology and communications mutual funds racked up outsized gains that year. Going global, Japanese and other Asian stock funds posted stunning results.

Fast-forward to the end of 2000. So far, the new millennium hasn't exactly been a bonanza for growth investors. Tech stocks peaked early in the year and then slid. By year-end, according to Morningstar Inc., the Chicago-based mutual fund research company, large-cap growth funds were down roughly 14.09% and specialized technology sector funds produced a 33.13% decline for the year. International funds, particularly those focused on Japan and Asia, plunged, too, losing an average of 31.92% of their value in 2000.

"Some mutual funds, especially Internet funds, were hype funds, sold to investors who thought trees would grow to the sky," says Dywane Hall, a principal in the Alexandria, Virginia, office of LPL Financial Services. "When technology stocks fell after the first; quarter of 2000, some investors had severe losses, perhaps the first losses they had ever experienced. Some funds fell 60% to 80% from their peaks last year."

Nevertheless, while the broad U.S. stock market registered its worst year since the 1970s, many mutual fund investors found reason to cheer. Value funds--the laggards of 1998 and 1999 that hold out-of-favor, bargain-priced stocks--led the way. In fact, small-cap and midcap value funds had healthy double-digit returns, due largely to the energy and financial stocks in their portfolios.

Indeed, specialized energy and financial funds performed well in 2000, but the leader was the healthcare sector, where the average fund produced a return of 55.4% for the year, thanks to wide-ranging strength among pharmaceuticals, biotech, medical devices, hospitals, and HMOs.

Aside from this seesaw stock market, bond funds were strong in 2000. Funds holding long-term Treasury bonds gained nearly 15.04%, while most other types of bonds funds (corporate, government, and municipals) had total returns of around 9.78%, a satisfying result in a year when the Dow Jones industrial average fell 4.85%.

What lessons can you learn from such varied results? "In 2000, we saw that the principle of asset allocation still works," says Jerry Mosher, a financial planner in Lafayette, California. "For the past few years, people wanted only one class of stock, large-company growth stocks, because that category was doing so well. In 2000, we saw value stocks outperform growth stocks while small and mid-sized companies beat large companies. Investors learned that it pays to spread their risks over many different types of funds."

For some investors, though, this was a painful lesson to learn. "Some investors insisted on putting everything into technology stocks and tech funds," says Mosher. "In some cases, a $1 million portfolio became a $300,000 portfolio after tech stocks collapsed."

When identifying mutual funds for your portfolio, you should weigh a number of factors, including the portfolio manager's track record and investment style as well as the fund's expense ratio (see "New Millennium, New Funds," December 1999). And when you review our top funds, which were selected with the help of Morningstar--you will have to undertake a close examination since a good number of them are young funds with less than $100 million in assets.

* DIVERSIFICATION IS THE KEY

To avoid being buried by a similar avalanche, you should hold both growth and value stocks in your portfolio. One investor who believes in this philosophy is Denver-based Todd Wilson, an AT&T Wireless Services' general manager for the state of Colorado. "I want to spread my risk over different mutual funds investing in different industries," he says. "To further reduce risk, I invest at least 10% of my income every month. This technique, which is called dollar-cost averaging, means that I sometimes buy high and sometimes buy low, but my average cost-per-share is reduced."

Wilson views himself as a fairly aggressive investor who leans toward equities, with an emphasis on technology stocks. "Although my portfolio was down in 2000," he says, "I'll keep investing in my funds. Considering the prices of tech stocks now, I'm buying low in some of my funds. I'm not planning to retire for 10 years or more, so I expect I'll eventually sell these funds at higher prices." Among his holdings: Fidelity Equity-Income II Fund (FEQTX), a large-cap value fund.

Richard Peace, a certified financial planner in Colorado Springs, Colorado, who advises Wilson, has added AIM Blue Chip Fund (ABCAX) and AIM Value Fund (AVLFX) to Wilson's portfolio; both of these funds are classified as "blend" funds by Morningstar, meaning they hold both growth and value stocks. "Don't put all of your money into one style," Peace advises, "because you never know where the market leaders will come from." The AIM fund family believes in team management, according to Peace, so the funds are not dependent on a single manager who might leave tomorrow. With AIM funds, investors have management diversification as well.

Continued confidence in growth funds also is expressed by Glen C. Moore, founder and president of Orion Services L.L.C., a Herndon, Virginia, consulting firm that specializes in systems engineering for telecoms. "Because of the work I do," says Moore, "I have a bias toward technology, which is an exciting area."

Among Moore's holdings is Putnam Voyager Fund (PVOYX), a growth fund with more than half of its assets in technology and telecom issues. "Voyager is a top fund," says Hall, who advises Moore, "but it frequently distributes capital gains to investors, who'll owe tax. That's why I suggest holding this fund in an IRA or some other tax-deferred account. For taxable accounts, investors might consider Liberty Tax-Managed Growth Fund (STMAX), a fund designed to offset any taxable gains with losses elsewhere in its portfolio."

* LARGE CAPS VS. SMALL CAPS

For years, large caps have been the big dogs of the markets. In some years, though, smaller firms will outrace the giants. That means you should plan to invest in some funds with small-cap players. Offers Reading: "Schwab Small-Cap Index Fund (SWSMX) is a good choice for investors because it provides a broad mix of small companies. The fund is designed to track the Russell 2000 in the U.S. across a variety of industries."

Another potential growth area: international stock funds. You may ask yourself if you really need to hold funds that provided little protection against a downturn in the U.S. market last year. "It's true that foreign markets went down with the U.S. market in 2000," says Mosher. "Nevertheless, I think there will be times when U.S. investors will benefit from foreign exposure." In 1999, for example, Asian and Latin American stocks far outpaced the broad U.S. market indexes. And mutual fimds that invested in Japanese stocks posted a hefty 117% return that year.

Moore, who added the top-rated Oppenheimer Global Growth and Income Fund (OPGIX) to his portfolio mix, agrees. "There are outstanding growth opportunities in Europe and Southeast Asia," he says.

* ROUNDING UP TECH AND HEALTHCARE FUNDS

While diversifying into foreign stocks may be a sound move for Moore, he has yet to give up on the tech sector. "Technology stocks will come back," he says. "Not the dot-coms, which were overpriced: Those chickens have come home to roost. On the other hand, the tech companies that are left standing have much better economics now. They can hire good people at reasonable salaries, which wasn't the case a year ago."

He likes technology infrastructure stocks now: these are the companies supplying the components for the Internet and for advanced telecommunications systems. In practice, that means increasing his stake in Alliance Technology Fund (ALTFX), a fund that ranks among the top 1% of all mutual funds for 10- and 15-year performance. According to Morningstar, a $10,000 investment in this fund back in 1985 would be worth more than $225,000 today.

Hall believes that aggressive investors "who are well versed in such issues as gene mapping" make good candidates for investing in a specialized biotech funds. His recommendation? Rydex Biotechnology Fund (RYOAX), a fund designed to provide a return in tandem with the overall biotech sector.

Not every investor should put money into biotech funds, though. These investments have high peaks but costly valleys: The last huge biotech surge, in 1989 to 1991, was followed by a three-year period (from 1992 through 1.994) when biotech stocks leaked money, and the same could happen again.

Richard Hammel, a financial planner in Brentwood, Tennessee, generally advises his clients to add healthcare to their portfolio through broadbased funds. "Vanguard Health Care Fund (VGHCX) has an ample number of biotech issues," he says, "but there are other types of holdings, too, such as pharmaceuticals and medical devices. Therefore, this fund is less volatile than a pure biotech fund, yet it still has posted excellent results."

For a one-stop play on both technology and healthcare, consider a fund suggested by Peace: AIM Dent Demographic Trends Fund (ADDAX). This fund is subadvised by Harry S. Dent Jr., who accurately predicted that the Dow Jones industrial average would hit 10,000 by the end of the decade in his book The Great Boom Ahead (Hyperion Press, $10.95). His subsequent best-sellers, The Roaring 2000s (Touchstone Books, $14) and The Roaring 2000s Investor (Simon & Schuster, $25), forecast that the bull market will continue until 2008.

* ASSET ALLOCATION FOR THE FUTURE

Dent advocates investing by sector rather than by market capitalization or investment style. "Our model portfolio calls for a 40% to 50% allocation to technology stocks, which includes telecommunications," he says. "We also advocate a 15% to 25% allocation to financial services and 10% to 20% to healthcare."

Technology, according to Dent, will continue to generate profits for investors. Financial services firms will prosper as the baby boomers reach their peak investment years and step up retirement savings. And the overall aging of America, he concludes, is encouraging for health-care companies.

Altogether, these three sectors might account for 80% to 90% of a suggested portfolio. "The other 10% to 20% might go into international opportunities," he says. "You can either put that allocation into giant multinationals with worldwide operations or, even better, into Asian countries with the exception of Japan." (Asia outside of Japan, says Dent, is where the world's best demographic prospects can be found.)

Altogether, this combination delivers an outstanding combination of risks and returns, according to Dent. "I've back-tested our model in the 1990s, the decade most similar in economic trends to the one we're in now," he says. "Our portfolio would have returned about 30% more than the S&P 500, with only a 5% increase in volatility, and the S&P 500 performed much better than the conventional asset allocation model."

* DESIGNING THE BALANCED PORTFOLIO

As investors learned in 2000, there are times when bonds outperform stocks, so you probably should hold some bond funds for true diversification. "There are very few people who should be invested 100% in equities," says Reading. "Most people should have a 10% to 30% allocation to fixed-income securities. If you're 100% in stocks, you're probably taking too much risk for no reason. Adding some bonds to your portfolio will reduce your exposure to steep market drops, yet a portfolio with a modest allocation to bonds is still likely to generate the returns you need to meet your goals."

One approach is to invest in bonds through a balanced fund that holds both stocks and bonds. Wilson holds Fidelity Balanced Fund (FBALX) and Fidelity Asset Manager Fund (FASMX), both of which generally hold 50% to 60% of their assets in large-cap stocks and the remainder mainly in bonds issued by the federal government and its agencies. Both of these funds have long-term average returns of around 9% to 12%, with seldom a down year: In 2000, they both wound up with modest positive returns.

Thus, you can buy a fund with built-in diversification or you can put together a diversified mix of funds. In any case, don't concentrate on one or two investment areas, especially those areas that currently are leading the league. "Don't buy at the peak," says Hall. "I've seen studies showing that mutual funds have returned 15% per year, but the average individual investor earned only 7%. That's because individuals buy the hot funds, at the top, and sell funds when the category is weak. They're always getting in and out at the wrong time."

If you put together a well-balanced portfolio of funds and don't follow the herd, chances are you'll wind up earning twice as much as investors who were trampled because they fancied themselves farsighted fund pickers.

[TABULAR DATA NOT REPRODUCIBLE IN ASCII]
COPYRIGHT 2001 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:KORN, DONALD JAY
Publication:Black Enterprise
Geographic Code:1USA
Date:Apr 1, 2001
Words:2508
Previous Article:Winning With the Market.
Next Article:THE PERILS OF BEING PUBLIC.
Topics:


Related Articles
E-BUSINESS NEWS.
Northstar wins $100M backing for fund.
$9 BILLION SOUGHT FOR NEW SCHOOLS.
STANDING TALL, NICHOLAS LEADS WOMEN'S OPEN; FIVE-FOOT GOLFER AHEAD OF LOPEZ.
65 PLACES CHARLES IN CHARGE HOWELL TAKES ONE-SHOT LEAD; RIVIERA PAYS THE PRICE.
Low income housing developers get city tax credits.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters