While oil prices soared from roughly $43 per barrel in early January to more than $55 by midyear, the broad market hasn’t performed nearly as impressively. In fact, with a few exceptions, neither stock nor bond funds have taken off.
So what’s an investor to do? Diversification is the key. “I mix it up,” says Steve Noakes, a consultant who specializes in information security in Falls Church, Virginia. “I have funds holding small-, mid-, and large-cap stocks, along with international stocks.” This approach puts Noakes in a position to gain if one area of the market gets hot, and it protects him against steep losses such as those suffered by tech-heavy investors from 2000 to 2002.
For the last 15 years, Noakes has invested in Fidelity Destiny II, a fund that held 111 different stocks at last report. With this fund, investors commit to monthly contributions for at least 10 years.
“Investors should have a little bit of everything,” says Ivory Johnson, director of financial planning at The Scarborough Group in Annapolis, Maryland. “Every asset class has its day in the sun, and you can’t predict which will shine in the next six months. By filling in all the categories, you can reduce the volatility of your portfolio.”
Johnson says real estate mutual funds are among his most desirable holdings. The following were key trends in mutual fund performance in the first half of the year:
Domestic stock funds posted slight losses (performance was down less than 1%). Value funds topped growth funds. Mid value, small value, real estate investment trusts, corporate bonds, and emerging markets were all up more than 2%.
After natural resources, stock funds were led by two other niche categories: Latin American funds (up 11.78%) and utilities funds (up more than 10%).
ooOn the bright side, there were no enormous losers. The worst performers were precious metals funds and technology funds, both down more than 5%.
World stock funds, too, posted modest losses in the first half. Emerging markets stock funds (up 4.92%) did well.
Emerging markets bond funds did even better, up 5.28%. More traditional bond funds generally provided smaller returns to investors.
Investors are hoping performances during the second half fare a bit better. “There are no obvious answers,” says Cheryl Holland, president of Abacus Planning Group in Columbia, South Carolina.
Suppose, instead of diversifying, you put all your money into large-cap growth funds. Such funds are expected to be long-term winners but they can suffer severe losses in any given year. “If you’re down 30% one year,” says Johnson, “you have to gain 43% just to get back to where you were. By spreading your investments, you reduce the risk of taking such a huge loss.”
Noakes’ approach to investment is a mixed bag.
For example, 2002 was the worst year in recent memory for domestic stock funds (down more than 22%), while bond and real estate funds registered gains. A diversified portfolio would have experienced losses much less than 22%.
Investing regularly as Noakes has done with Fidelity Destiny II is known as dollar-cost averaging, which assures you’re buying when stocks are low as well as when they’re high. Such long-term perseverance pays off: Fidelity Destiny II, for example, has returned nearly 13% per year for the last 15 years. With such results, an initial $10,000 investment would have grown to more than $60,000.
Make combination plans. Historically, investors seeking double-digit returns have found them in stock funds rather than bond funds. Nevertheless, a truly diversified portfolio will include some bond funds, which held up well while stocks plummeted from 2000 to 2002.
For instance, Bernee and Hillary Dunson of Atlanta, both 40, hold a mix of investments that includes individual stocks and real estate. “I also have a retirement plan at my dental practice,” says Bernee. “There, I invest in mutual funds, which my wife and I select.” Hillary says the retirement plan’s largest holding is Buffalo High-Yield Fund. This fund, which primarily invests in “high-yield” (low-rated, or junk) bonds, delivered positive annual returns throughout the recent bear market for stocks and shows an annual return of about 9% for the last five years.
Portfolio diversification also affects how the Dunsons invest for their two young children, who are literally model youngsters. The children’s photos are used to promote Bernee’s dental practice. Not only does this provide a nice tax break (deductible payments for the dental practice and tax-free income to the children), it also gives the younger Dunsons money to invest.
“The money has been invested in Roth IRAs,”
says Lee Baker of Apex Financial Services in Tucker, Georgia, who serves as the Dunsons’ financial planner. In 2005, up to $4,000 worth of earned income can be contributed by each child. Investment earnings are not taxed and, after age 591/2, withdrawals will be tax-free.“The Roth IRA money is invested in mutual funds,” says Baker. “The same is true for each child’s 529 plan.” Again, 529 plans offer tax-free investing, provided that the money is ultimately used for higher education.
For the young Dunsons, Baker recommends Virginia’s 529 plan, choosing mutual funds run by American Funds. “Their money is in Investment Company of America for domestic stocks, New Perspective for global stocks, and Bond Fund of America,” Baker says. “This is a nice mix of funds from a company that has done a good job of keeping costs low and providing excellent returns. The Roth IRA money is invested in American Funds Growth Fund of America, which rounds out their portfolios.”
Hedge your bond bets. Investors seeking to include bond funds in a diversified portfolio need to be careful these days. “With a flat yield curve, you might be better off with short- and intermediate-term bond funds,” says Johnson. “There are concerns that long-term interest rates will rise.” That is, short-term bonds now yield nearly as much as long-term bonds. If you invest in long-term bond funds to get a little more yield, you’ll risk losing principal, because long-term bonds lose value when interest rates rise.
“I also like TIPS funds,” says Johnson, referring to mutual funds that invest in Treasury inflation-protected securities. These bonds, obligations of the federal government, will pay higher yields if inflation rises, as many forecasters expect. Johnson’s firm has a policy that prohibits mentioning specific funds, but TIPS funds are available from several mutual fund families, including Fidelity, Vanguard, and PIMCO.
Mark Salzinger, who publishes the No-Load Fund Investor newsletter out of Brentwood, Tennessee, offers another way to reduce interest-rate risk in bond funds. “Fidelity’s Floating Rate High Income Fund invests mainly in bank loans,” he says. “If inflation increases and interest rates move up, the rates on those bank loans will go higher, so payments to investors will rise.”
Stay well stocked. Among stock funds, Baker suggests that a core holding might be
T. Rowe Price Total Equity Market Index Fund, which tracks the Dow Jones Wilshire 5000 Composite Index and thus provides exposure to the broad market. “Cutting expenses will pay off over the long term,” he says, “and index funds tend to be less expensive than funds where the managers try to pick stocks.”If you prefer funds that try to beat the market rather than match a broad index, you should hold several funds that buy different types of stocks. Russ Kinnel, Morningstar’s director of mutual fund research, expresses an interest in funds that hold large company growth stocks.
“I’m not arguing that large-growth is a sure-fire hit for the next 12 months,&
quot; says Kinnel, “but you ought to get a pretty good return over the next five to 10 years. The managers of large-growth funds have very small cash positions, which signals that they are finding a lot of attractive investments.” Over the last five years, large-cap growth funds have lost 8.32% per year while small-cap value stocks have returned 14.86% a year, so it may be time for the tables to turn.
Large-growth funds might get a boost from a familiar market sector: tech stocks. “If I had to pick one area for investing, it would be technology,” says Johnson. “Corporations are holding as much cash now as they’ve had in the last 45 years, and a great deal of that cash probably will go to upgrade obsolete technology. Rather than invest in a specialized technology fund, I’d choose a diversified fund with a manager who has been successful enough in picking sectors to outperform the market for the past five or 10 years.” Among Morningstar’s favored large-cap growth funds, Fidelity Capital Appreciation and Vanguard Growth Equity have substantial exposure to information technology.
Growth funds can be balanced by value funds such as Artisan Mid Cap Value and TCW Galileo Dividend Focused Fund, which are Salzinger’s selections. “Another way to diversify your portfolio,” he says, “might be to invest in a fund that holds the stocks of companies that produce commodities, such as T. Rowe Price New Era.”
Keep up with foreign affairs. Once you have determined your allocation of stock and bond funds, the third leg of the stool is international investing. “We don’t want to
have all of our eggs in the U.S. basket,” says Holland. “We’re concerned that the dollar may weaken.” If the U.S. dollar loses ground, the stocks of foreign countries are likely to appreciate as their currencies move up in value.“We have steadily recommended international allocations,” says Holland, “including international small-cap and emerging markets funds for most clients. Altogether, about 20% of equity allocations are in international funds.” Holland’s favorite foreign funds include Harbor International (a value fund) and Artisan International (which holds growth stocks); for smaller accounts that may have room for just one foreign fund, she cites Vanguard Total International Stock Index Fund, which combines European, Pacific, and emerging markets indexes.
“For international investing,” says Johnson, “China and India are poised for growth while the European Union seems to have problems. My preference is to invest in a world stock fund and let the manager pick the best companies. However, you might want to look and see if the manager has a history of investing in the high-growth areas of Asia.”
Kinnel suggests combining Vanguard International Growth, a large-cap fund that does not hedge currency risk, with Tweedy, Browne Global Value, a fund that invests in smaller companies and hedges in order to protect U.S. investors from a weak dollar. “This strategy can provide more diversification for your overseas holdings,” he says.
Thus, to diversify your mutual fund holdings you must go beyond buying a few funds holding the same blue-chip stocks; you need various types of assets, domestic and international. “Your mother and your grandmother probably told you not to put all your eggs in one basket,” says Baker. “Well, they were absolutely right. You shouldn’t try to catch the ‘next big thing.’ Instead, stick to a diversified portfolio.”
B.E.’s Top Mutual Fund Performers
| FUND NAME | TICKER SYMBOL | 1-YEAR RETURN | 3-YEAR RETURN | 5-YEAR RETURN | MINIMUM INITIAL INVESTMENT | PHONE |
|
LARGE GROWTH |
||||||
| Old Westbury Mid Cap Equity | OWMCX | 4.83% | 4.23% | 5.30% | $ 1,000 | 800-607-2200 |
| Legg Mason Growth Trust Primary | LMGTX | -2.92 | 22.35 | 3.14 | 1,000 | 800-822-5544 |
| Calvert Social Investment Equity A | CSIEX | 5.56 | 6.70 | 2.81 | 1,000 | 800-368-2748 |
| Dreyfus Premier Alpha Growth T | BSFAX | 6.03 | 6.60 | 2.72 | 1,000 | 800-554-4611 |
| Fidelity Contrafund | FCNTX | 11.94 | 11.53 | 2.58 | 2,500 | 800-343-3548 |
|
MID GROWTH |
||||||
| Delaware American Services A | DASAX | 11.30 | 17.87 | 16.33 | 1,000 | 800-362-7500 |
| Eagle Growth | EGRWX | 17.22 | 7.27 | 11.16 | 500 | 800-749-9933 |
| Meridian Growth | MERDX | 2.65 | 11.03 | 11.14 | 1,000 | 800-446-6662 |
| Columbia Acorn Select Z | ACTWX | 10.23 | 14.49 | 10.71 | 1,000 | 800-345-6611 |
| Munder MidCap Select A | MGOAX | 17.00 | 17.19 | 8.95 | 2,500 | 800-468-6337 |
|
SMALL GROWTH |
||||||
| Oberweis Micro-Cap | OBMCX | 2.27 | 23.13 | 12.59 | 1,000 | 800-323-6166 |
| Schroder U.S. Opportunities Inv | SCUIX | 14.48 | 14.55 | 11.10 | 10,000 | 800-464-3108 |
| John Hancock Small Cap A | DSISX | 10.92 | 9.79 | 9.33 | 1,000 | 800-225-5291 |
| Dreyfus Premier Future Leaders R | DFLRX | 9.98 | 10.42 | 9.29 | 1,000 | 800-334-6899 |
| Dreyfus Premier Future Leaders A | DFLAX | 9.54 | 10.01 | 8.91 | 1,000 | 800-334-6899 |
|
LARGE BLEND |
||||||
| Mairs & Power Growth | MPGFX | 5.96 | 11.52 | 11.16 | 2,500 | 800-304-7404 |
| Century Shares Trust | CENSX | 6.09 | 7.57 | 11.06 | 250,000 | 800-321-1928 |
| AmSouth Select Equity A | ASECX | -2.13 | 7.19 | 8.98 | 1,000 | 800-451-8382 |
| Thompson Plumb Growth | THPGX | -4.23 | 7.41 | 8.61 | valign=”middle”>2,500 | 800-999-0887 |
| Fidelity Select Food & Agriculture | FDFAX | 8.80 | 5.25 | 8.19 | 2,500 | 800-343-3548 |
|
MID BLEND |
||||||
| CGM Focus | CGMFX | 27.97 | 17.17 | 30.20 | 2,500 | 800-345-4048 |
| Fairholme | FAIRX | 25.37 | 17.65 | 18.67 | 2,500 | 866-202-2263 |
| Kinetics Paradigm | WWNPX | 27.44 | 22.17 | 16.88 | 2,500 | 800-930-3828 |
| RS Value | RSVAX | 29.24 | 28.43 | 16.72 | 5,000 | 800-766-3863 |
| FPA Paramount | FPRAX | 8.88 | 14.80 | 15.18 | 1,500 | 800-982-4372 |
|
SMALL BLEND |
||||||
| Bridgeway Ultra-Small Co. Mkt Fun | BRSIX | 6.12 | 25.45 | 21.21 | 2,000 | 800-661-3550 |
| Texas Capital Value & Growth | TCVGX | 20.39 | 19.40 | 20.45 | 2,000 | 800-880-0324 |
| Stratton Small-Cap Value | STSCX | 23.11 | 20.02 | 19.49 | 2,000 | 800-634-5726 |
| Pacific Advisors Small Cap A | PASMX | 4.38 | 19.97 | 17.78 | 0 | 800-989-6693 |
| Strategic Partners Small Cap Value | PZVAX | 19.59 | 18.83 | 17.49 | 1,000 | 800-225-1852 |
|
LARGE VALUE |
||||||
| Yacktman Focused | YAFFX | 7.37 | 14.52 | 17.97 | 2,500 | 800-525-8258 |
| Yacktman | YACKX | 6.89 | 15.16 | 17.80 | 2,500 | 800-525-8258 |
| John Hancock Classic Value A | PZFVX | 10.43 | 14.13 | 17.32 | 1,000 | 800-225-5291 |
| Clipper Focus PBHG | PBFOX | 4.60 | 6.34 | 13.73 | 2,500 | 800-433-0051 |
| Oakmark Select I | OAKLX | 8.61 | 9.50 | 13.70 | 1,000 | 800-625-6275 |
|
MID VALUE |
||||||
| Fidelity Select Constr. & Housing | FSHOX | 31.82 | 18.85 | 22.54 | 2,500 | 800-343-3548 |
| Delafield | DEFIX | 9.48 | 14.09 | 18.76 | 5,000 | 800-221-3079 |
| Phoenix Mid-Cap Value A | FMIVX | 15.39 | 14.21 | 17.82 | 500 | 800-243-1574 |
| Marshall Mid-Cap Value Inv | MRVEX | 10.93 | 13.75 | 16.61 | 1,000 | 800-236-8560 |
| Janus Mid Cap Value Investor | JMCVX | 12.26 | 14.53 | 16.38 | 2,500 | 800-525-3713 |
| Pacific Capital Small Cap A | PCSAX | 14.65 | 18.17 | 21.01 | 1,000 | 800-258-9232 |
| Berwyn | BERWX | 16.37 | 16.41 | 20.88 | 3,000 | 800-992-6757 |
|
SMALL VALUE |
||||||
| Pacific Capital Small Cap B | PCSBX | 13.78 | 17.29 | 20.08 | 1,000 | 800-258-9232 |
| JPMorgan Small Cap Value A | N=”MIDDLE”>PSOAX | 12.20 | 11.87 | 18.34 | 1,000 | 800-480-4111 |
| Legg Mason U.S. Small Cap Value Prim | LMSVX | 14.79 | 13.20 | 18.26 | 1,000 | 800-577-8589 |
|
MODERATE ALLOCATION |
||||||
| Bruce | BRUFX | 27.83 | 43.42 | 33.40 | 1,000 | 800-872-7823 |
| T. Rowe Price Capital Appreciation | PRWCX | 10.72 | 12.62 | 13.64 | 2,500 | 800-638-5660 |
| Oakmark Equity & Income I | OAKBX | 6.24 | 10.46 | 13.03 | 1,000 | 800-625-6275 |
| EquiTrust Managed | FBMGX | 7.18 | 8.90 | 10.31 | 250 | 877-860-2904 |
| Greenspring | GRSPX | 5.63 | 10.32 | 10.18 | 2,000 | 800-366-3863 |
source: morningstar inc. morningstar makes every effort to ensure the accuracy AND COMPLETENESS of this data, but cannot guarantee it. top funds in each category, ranked by FIVE-year returns. open to the public. returns through june 30, 2005.
| FUND NAME | TICKER SYMBOL | 1-YEAR RETURN | 3-YEAR RETURN | 5-YEAR RETURN | MINIMUM INITIAL INVESTMENT | PHONE |
|
WORLD STOCK |
||||||
| Polaris Global Value | PGVFX | 14.75% | 17.72% | 13.67% | $2,500 | 888-263-5594 |
| Vanguard Global Equity | VHGEX | 15.29 | 15.32 | 9.49 | 3,000 | 800-662-7447 |
| Templeton Global Smaller Comp A | TEMGX | 19.01 | 16.86 | 9.41 | 1,000 | 800-342-5236 |
| Mutual Discovery A | TEDIX | 19.52 | 13.69 | 9.39 | 1,000 | 800-342-5236 |
| Pearl Total Return | PFTRX | 13.06 | 12.36 | 8.92 | 3,000 | 866-747-9030 |
| Fidelity Advisor Diversified Intl A | FDVAX | 14.22 | 14.03 | 4.58 | 2,500 | 877-208-0098 |
| Marsico International Opportunities | MIOFX | 7.51 | 11.55 | 3.71 | 2,500 | 888-860-8686 |
|
FOREIGN LARGE GROWTH |
||||||
| Fidelity Advisor Diversified Intl B | FDIBX | 13.22 | 13.01 | 3.66 | 2,500 | 877-208-0098 |
| Laudus Int’l MarketMasters In | SWOIX | 14.71 | 13.46 | 1.64 | 2,500 | 800-435-4000 |
| MFS International Growth A | MGRAX | 10.53 | 11.87 | 0.21 | 1,000 | 800-225-2606 |
|
FOREIGN LARGE BLEND |
||||||
| Fidelity Canada | FICDX | 29.10 | 21.96 | 10.51 | 2,500 | 800-343-3548 |
| Exeter World Opportunities A | EXWAX | 15.40 | 14.04 | 7.07 | 2,000 | 800-466-3863 |
| Thornburg International Value A | TGVAX | 15.77 | valign=”middle”>13.29 | 5.03 | 5,000 | 800-847-0200 |
| Vanguard International Value | VTRIX | 14.94 | 12.72 | 3.18 | 3,000 | 800-662-7447 |
| Members International Stock A | MINAX | 18.71 | 14.09 | 3.08 | 1,000 | 800-877-6089 |
|
LONG-TERM GOVERNMENT |
||||||
| American Cen. Target Mat 2025 Inv | BTTRX | 36.56 | 18.46 | 13.34 | 2,500 | 800-345-2021 |
| American Cen. Target Mat 2020 Adv | ACTEX | 26.01 | 15.11 | 12.28 | 2,500 | 800-345-2021 |
| Wasatch-Hoisington U.S. Treasury | WHOSX | 25.69 | 12.90 | 10.99 | 2,000 | 800-551-1700 |
| American Cen. Target Mat 2015 Inv | BTFTX | 16.24 | 11.78 | 10.96 | 2,500 | 800-345-2021 |
| PIMCO Long-Term U.S. Gov’t A | PFGAX | 15.17 | 9.67 | 10.25 | 5,000 | 888-877-4626 |
|
INTERMEDIATE GOVERNMENT |
||||||
| Vanguard Inflation-Protected Secs | VIPSX | 9.07 | 9.21 | 9.77 | 3,000 | 800-662-7447 |
| American Century Inflat-Adj Bd Inv | ACITX | 8.95 | 8.63 | 9.19 | 2,500 | 800-345-2021 |
| BlackRock Government Inc Inv A | CCGAX | 7.01 | 5.73 | 8.14 | 500 | 800-441-7762 |
| Vanguard Interm-Term U.S. Treas | VFITX | 6.25 | 5.73 | 7.73 | 3,000 | 800-662-7447 |
| PIMCO Total Return Mortgage D | PTMDX | 6.01 | 4.95 | 7.38 | 5,000 | 888-877-4626 |
|
SHORT-TERM GOVERNMENT |
||||||
| Managers Intermediate Duration Govt | MGIDX | 5.33 | 4.25 | 6.57 | 1,000 | 800-835-3879 |
| Marshall Government Income Inv | MRGIX | 5.73 | 4.46 | 6.10 | 1,000 | 800-236-8560 |
| Accessor Mortgage Securities Adv | AMSFX | 5.15 | 3.83 | 6.09 | 5,000 | 800-882-9612 |
| American Century Target Mat 2005 Inv | BTFIX | 1.59 | 3.24 | 6.05 | 2,500 | 800-345-2021 |
| Allegiant Government Mortgage A | ARSAX | 5.43 | 3.87 | 5.92 | 500 | 800-622-3863 |
|
LONG-TERM CORPORATE BOND |
||||||
| Delaware Extended Duration Bond A | DEEAX | 16.35 | 13.91 | 12.75 | 1,000 | 800-362-7500 |
| Vanguard Long-Term Invest.-Grade | VWESX | 17.76 | 10.84 | 10.92 | 3,000 | 800-662-7447 |
| Vanguard Long-Term Bond Index | VBLTX | 16.81 | 10.97 | 10.72 | 3,000 | 800-662-7447 |
| Lebenthal Taxable Municipal Bond | LTMBX | 11.36 | 7.66 | 9.31 | 2,500 | 800-221-5822 |
| Smith Barney Invest. Grade Bond A | SIGAX | 11.95 | 8.62 | 9.16 | 1,000 | 800-451-2010 |
|
SHORT-TERM BOND |
||||||
| Ivy Mortgage Securities A | IYMAX | 5.52 | 4.59 | 7.04 | 500 | 800-777-6472 |
| Phoenix Multi-Sector S/T Bd A | NARAX | 5.49 | 6.65 | 6.91 | 500 | 800-243-4361 |
| UMB Scout Bond | UMBBX | 4.08 | 3.78 | 5.98 | 1,000 | 800-996-2862 |
| Bremer Bond | BBNDX | 4.77 | 3.86 | 5.90 | 2,000 | 800-595-5552 |
| Brown Advisory Inter. Income A | BIATX | 4.19 | 4.44 | 5.89 | 2,000 | 800-540-6807 |
|
HIGH-YIELD BOND |
||||||
| Westcore Flexible Income | WTLTX | 10.35 | 10.99 | 9.43 | 2,500 | 800-392-2673 |
| Pioneer High Yield A | TAHYX | 5.76 | 11.39 | 9.36 | 1,000 | 800-225-6292 |
| Nations High Yield Bond Inv A | NAHAX | 8.93 | 13.47 | 9.12 | 1,000 | 800-321-7854 |
| AFBA Five Star High Yield I | AFHYX | 4.22 | 9.97 | 8.91 | 500 | 800-243-9865 |
| Calamos High Yield A | CHYDX | 8.75 | 11.01 | 8.74 | 2,500 | 800-823-7386 |
|
MUNI NATIONAL INTERMEDIATE |
||||||
| Harris Insight Tax-Exempt Bond N | HXBAX | 6.65 | 5.50 | 7.24 | 1,000 | 800-982-8782 |
| Delaware Tax-Free USA Interm. A | DMUSX | 8.45 | 6.28 | 6.85 | 1,000 | 800-523-4640 |
| Evergreen Municipal Bond A | EKEAX | 8.54 | 5.88 | 6.54 | 1,000 | 800-343-2898 |
| American Funds Tax-Exempt Bond A | AFTEX | 7.38 | 5.41 | 6.50 | 250 | 800-421-0180 |
| Federated Municipal Securities A | LMSFX | 8.29 | 5.49 | 6.39 | 1,500 | 800-341-7400 |
source: morningstar inc. morningstar makes every effort to ensure the accuracy AND COMPLETENESS of this data, but cannot guarantee it. top funds in each category, ranked by five-year returns. open to the public. returns through June 30, 2005.