Long-Distance Funds

The bull is back. According to Ibbotson Associates in Chicago, large-company U.S. stocks have returned 10.4% per year since 1926. Last year’s results were right on par, with the blue chips posting a total return of 10.9% (as measured by the Standard & Poor’s 500 Index).

For mutual fund investors, the news was even better. Morningstar Inc. reports that 58% of domestic stock-picking funds beat the S&P 500, while the average return for all domestic equity entries was a shade under 12%. For most mutual fund investors, then, 2004 was a year in the plus column, a welcome follow-up to the surge of 2003.

The following were among the highlights:

Specialty funds paced the domestic market. As real estate values shot up and oil prices spurted, funds in those categories gained 31.88% and 28.37%, respectively.

Small-cap funds beat large-cap funds while value stocks topped growth stocks. Morningstar’s small-value category, for example, led the large-growth group 20.58% to 7.65%.

Investors who ventured offshore did much better than those who stayed at home. The more adventurous you were, the better. While international equity funds returned 17.64% overall, the world’s best results, 38.26%, were posted by those eyeing Latin America.

Bond funds lagged, but they still outperformed expectations. Many forecasts called for rising interest rates, which would have devalued bond funds. But rates stayed fairly stable and taxable bond funds returned 4.92%.

Overall, 2004 turned out to be a good, if not great, year, following the 31.63% gain posted by domestic stock funds in 2003. And experts believe there are reasons to maintain a bullish posture. “We expect to see stable to slightly lower unemployment, which would lead to growth in household income and an increase in consumer spending,” says Keith Hembre, chief economist at U.S. Bancorp Asset Management, in Minneapolis. “Business investment should continue to grow at a moderate pace. These positive factors are likely to offset high oil prices and more interest rate increases by the Federal Reserve.”

The question that remains, though, is just how much longer will the bull roam the markets. So where should you put your investment dollars in 2005? Here’s what you should consider when seeking out long-distance runners:

Stick with stocks.”I’ve been conservative after seeing how the market fell in 2000 through 2002. Now, I think there are more opportunities, so I’m a little bit less cautious,” says Kathy Williams, a financial planner in Oklahoma City,

Dr. Leon Bragg, a 56-year-old dental services specialist in Oklahoma City who heads the state’s Medicaid dental program, is one of Williams’ clients. “Investors such as Dr. Bragg can take a little risk, as long as they avoid extreme losses,” she says. “Considering his age, his good health, and his family history of longevity, he needs long-term growth in his portfolio. Therefore, his normal asset allocation is 85% in stocks and 15% in bonds.”

Bragg’s allocation to stocks has included domestic funds such as the Growth Fund of America (GFAFX) and foreign vehicles such as the Tweedy, Browne Global Value (TBGVX) fund. Nevertheless, his equities have been below the 85% goal because of Williams’ caution. Now, she plans to move his stock allocation up to that level because she has more confidence in the stock market.

“I probably will add a mid-cap fund, such as Artisan Mid Cap Value (ARTQX) or Meridian Growth (MERDX),” says Williams. “I’m also looking at Ariel (ARGFX), a small-cap fund.” If the economy continues to expand this year, the smaller companies that made it through tough times might post impressive profits.

Keep your balance. Although small- and mid-cap funds have excelled recently, you shouldn’t overexpose your portfolio to those asset classes. “Don’t chase returns,” says Gareth Lyons, an analyst at Morningstar. “Just because an area was hot last year doesn’t mean it will be a leader in 2005. In fact, some of last year’s top funds might take a back seat to large-growth funds this year.”

Lyons’ recommendation is to seek a balance: Most investors should hold bond funds as well as stock funds. Among stock funds, you should have a mix of large- and small-cap, growth and value, and foreign and domestic. “Dollar cost averaging is a sound strategy,” he says, referring to the practice of investing a certain amount each month or each quarter to catch market lows and highs.

Although you shouldn’t chase performance, you shouldn’t ignore the past, either. “It’s very important to look at how funds performed during the bear market in order to get an idea of their long-term potential,” says Williams.

In fact, looking back five years gives you a good picture of what a fund has done in bear (2000 to 2002) as well as bull (2003 to 2004) markets. If the next few years will produce modest returns, as some forecasters expect, you’ll want funds that have run well — muddy course or fast track. “Look for funds and fund companies that have been good stewards of capital,” says Lyons. “You’ll want experienced managers who have performed well over an extended time period. In addition, investors should focus on expense ratios. Choosing funds with low expenses is a proven way to increase long-term returns, especially if we’re moving into a period where funds are going to return 8% or 9% a year. Funds with expense ratios of 1% or less will have a huge edge over funds that eat up 2% of your return each year.”

Cut your costs. If you’re hunting for inexpensive funds, do your homework. “I use Morningstar’s publications to help me diversify among mutual funds,” says Rick B. Miller, 43, an administrator for a government contractor in Silver Spring, Maryland. “I try to stick with four- and five-star funds because they’re the ones that have done best over the years.”

By conducting some careful research, Miller has put together a mix of cost-efficient funds. “For the most part, I prefer index funds, which tend to protect you if the market goes down,” Miller says. “My index funds are Vanguard funds, which have very low expense ratios.”

For example, Vanguard’s largest fund, Vanguard 500 Index (VFINX), which tracks the S&P 500

Index, charges investors a scant .18% per year. The average domestic stock fund takes 1.50% per year from their shareholders. (Vanguard 500 Index has been so popular that rival Fidelity cut the fee on its Spartan 500 Index [FSMKX] to 0.19% last year, enhancing its competitive position.)

“I also hold Vanguard Small Cap (NAESX) and Vanguard Mid Cap (VIMSX) index funds,” says Miller. On the bond side, he owns Vanguard Total Bond Market Index (VBMFX), which holds a mix of top-quality bonds.

“In addition,” says Miller, “I have some actively-managed funds

such as Vanguard International Growth (VWIGX) and Third Avenue Value (TAVFX).” All of these funds have done well during good times and not too badly in down markets. Miller says that he recently discontinued his investment in Legg Mason Value (LMVTX), despite its superior long-term record, because he is concerned about high fees.

Search for staying power. According to Miller, he has at least matched, and usually beaten, the market since he’s been doing his own fund picking. Nevertheless, he periodically seeks advice from LeCount Davis, a certified financial planner in Bethesda, Maryland, who maintains that several factors should be considered while choosing mutual funds.

“Instead of the one-year or year-to-date return,” says Davis, “we look at three- and five-year performance. That will give a better idea of how a fund might do in the future. The funds we recommend must meet or beat the category averages.” That is, a large-cap growth fund that
lags behind the large-growth category won’t be recommended. “We also look at the strength of a fund’s management and the way a fund allocates its money,” says Davis. If a fund is supposed to be a large-growth fund, for example, he will examine its top holdings to see if they’re the kind of large-growth stocks he wants his clients to own.

“Most important is the risk in a fund,” says Davis. “We have buy, hold, and sell lists. There are no funds on our buy list that have above-average risk levels, as ranked by Morningstar.”

Lower-risk funds might not shoot out the lights during a bull market, but they’re more likely to hold up in bear markets and reward long-term investors. “If a fund got through the 2000–2002 era, after the technology stock crash, it probably can get through another downturn,” says Davis.

Among Davis’ recommendations are Vanguard Wellesley Income (VWINX) and Vanguard Wellington (VWELX), a balanced fund, meaning that it holds both stocks and bonds, as well as the Dodge & Cox family of mutual funds.

Keep good company. Although he focuses on performance and expenses, Miller pays attention to other factors, too. “I’ve tried to keep away from funds that are under investigation when I read these reports,” he says. “In fact, I have dropped some funds that have been named in published arti

Investing for Janae has become a family project, with Victoria’sparents and sisters contributing to the college fund.

Look for the long term. Bragg says he was concerned when the stock market went down, but relieved when his balanced portfolio didn’t lose as much as the overall market. “My funds have come back since then,” he says, “so I’m pleased with the long-term results.”

The same spirit of perseverance is expressed by Victoria Lowe, 41, a teacher in New York whose foray into the stock market was launched when stocks were at lofty levels. “I became interested in investing when my daughter was a baby,” she says. “I was concerned about paying for her college education and I realized that a scholarship can’t be guaranteed. I know that you must have a college education and I was afraid of being priced out. That’s when I began investing in mutual funds every month, with regular transfers from my bank account.”

Victoria’s daughter, Janae, is now 6 years old, so Victoria started investing just before the bear market began. “At first,” she says, “it’s hard to [accept that] you’re losing money. But we know we’re in for the long run, so we’re leaving the money in there and we keep investing. In fact, I’ve started to do some investing in mutual funds for my own retirement through my retirement plan at work.

Investing for Janae has become a family project, with Victoria’s parents and sisters contributing to the college fund. “With mutual funds, many people can contribute a small amount each month,” says Victoria. “You don’t even

For bond funds as well as stock funds, it pays to bank on the basics: good management, low costs, and a history of both dodging the bears and running with the bulls.

B.E.’S TOP 100 MUTUAL FUND PERFORMERS

FUND NAME	TICKER	1-YR RETURN %	3-YR RETURN %	5-YR RETURN %	MINIMUM INITIAL PURCHASE	PHONE
Large Growth
American Eagle Twenty	AETWX	18.52	1.74	5.90	$1,000	800-335-0333
Jensen J	JENSX	6.01	3.09	5.64	2,500	800-992-4144
American Funds Amcap A	AMCPX	9.81	5.01	3.41	250	800-421-0180
Old Westbury Mid Cap Equity	OWMCX	9.15	3.63	3.30	1,000	800-607-2200
Transamerica Premier Core Equity Inv	TPVIX	13.81	4.62	3.11	1,000	800-892-7587
Mid-Cap Growth
Meridian Growth	MERDX	14.47	11.63	15.40	1,000	800-446-6662
Columbia Acorn Select Z	ACTWX	18.58	12.60	11.48	1,000	800-345-6611
Heritage Mid Cap Stock A	HMCAX	17.50	6.03	11.15	1,000	800-421-4184
Calamos Growth A	CVGRX	18.65	12.41	10.67	1,000	800-823-7386
First American Mid Cap Growth Opp A	FRSLX	21.29	10.94	10.51	1,000	800-677-3863
Small Growth
Schroder U.S. Opportunities Inv	SCUIX	25.29	11.71	15.33	10,000	800-464-3108
Oberweis Micro-Cap	OBMCX	2.19	20.84	14.99	1,000	800-323-6166
John Hancock Small Cap A	DSISX	23.60	12.64	14.17	1,000	800-225-5291
First American Small Cap Select A	EMGRX	15.35	10.92	12.86	1,000	800-677-3863
Lighthouse Opportunity	LGFTX	11.35	8.11	12.33	2,000	866-811-0218
Large Blend
Mairs & Power Growth	MPGFX	=”MIDDLE”>17.99	11.05	13.02	2,500	800-304-7404
Century Shares Trust	CENSX	12.51	7.14	10.51	1,000	800-321-1928
Thompson Plumb Growth	THPGX	4.16	3.01	10.35	2,500	800-999-0887
AmSouth Select Equity I	ASEPX	10.01	8.12	8.95	1,000	800-451-8379
AllianceBernstein Focused Growth & In	ADGAX	8.86	5.73	8.53	1,000	800-221-5672
Mid-Cap Blend
Delaware American Services A	DASAX	23.31	19.11	21.32	1,000	800-362-7500
The Fairholme Fund	FAIRX	24.93	15.09	18.85	2,500	866-202-2263
TCW Galileo Value Opportunities I	TGVOX	10.72	6.27	17.26	2,000	800-386-3829
RS Contrarian Value	RSCOX	29.31	29.59	17.10	5,000	800-766-3863
Meridian Value	MVALX	15.10	10.34	15.53	1,000	800-446-6662
Small Blend
CGM Focus	CGMFX	12.33	15.41	28.43	2,500	800-345-4048
Perritt Micro Cap Opportunities	PRCGX	17.14	24.36	22.40	1,000	800-332-3133
Munder Small-Cap Value A	MNVAX	24.69	20.02	19.95	2,500	800-468-6337
Stratton Small-Cap Value	STSCX	26.43	19.63	18.66	2,000	800-634-5726
Texas Capital Value & Growth	TCVGX	17.63	18.16	18.55	2,000	800-880-0324
Large Value
John Hancock Classic Value A	PZFVX	14.28	13.39	17.50	1,000	800-225-5291
Yacktman	YACKX	9.93	17.67	17.17	2,500	800-525-8258
TCW Galileo Dividend Focused N	TGIGX	17.42	11.80	15.65	2,000	800-386-3829
Oakmark Select I	OAKLX	9.73	7.40	14.46	1,000	800-625-6275
Clipper Focus PBHG	PBFOX	6.82	6.26	14.13	2,500	800-433-0051
Mid-Cap Value
Phoenix Mid-Cap Value A	FMIVX	24.74	15.63	17.88	500	800-243-1574
Goldman Sachs Mid Cap Value A	GCMAX	25.37	14.90	17.47	1,000	800-526-7384
PIMCO PEA Renaissance A	PQNAX	15.54	10.60	17.34	5,000	888-877-4626
Fidelity Select Construction & Housing	FSHOX	28.52	19.22	17.23	2,500	800-343-3548
Janus Mid Cap Value Investor	JMCVX	18.36	12.75	17.08	2,500	800-525-3713
Small Value
Pacific Capital Small Cap A	PCSAX	23.48	20.56	22.63	1,000	800-258-9232
Royce Opportunity Inv	RYPNX	17.51	19.02	18.84	2,000	800-221-4268
Delafield	DEFIX	20.85	16.15	18.75	5,000	800-221-3079
Armada Small Cap Value A	AMRRX	21.30	14.49	18.53	500	800-622-3863
Smith Barney Small Cap Value A	SBVAX	20.80	15.56	18.52	1,000	800-451-2010
Moderate Allocation
Bruce Fund Inc.	BRUFX	57.19	42.02	37.21	1,000	800-872-7823
FPA Crescent*	FPACX	10.21	12.97	15.25	1,500	800-982-4372
T. Rowe Price Capital Appreciation	PRWCX	15.29	13.30	14.40	2,500	800-638-5660
Oakmark Equity & Income I	OAKBX	10.36	9.99	13.49	1,000	800-625-6275
Greenspring	GRSPX	8.69	10.31	11.34	2,000	800-366-3863

FUND NAME	TICKER	1-YR RETURN %	3-YR RETURN %	5-YR RETURN %	MINIMUM INITIAL PURCHASE	PHONE
World Stock
Oakmark Global I	OAKGX	15.63	19.03	18.59	$1,000	800-625-6275
Polaris Global Value	PGVFX	23.63	23.58	12.69	2,500	888-263-5594
Mutual Discovery A	TEDIX	18.93	12.22	9.86	1,000	800-342-5236
Templeton Global Smaller Comp A	TEMGX	26.27	20.88	9.73	1,000	800-342-5236
Vanguard Global Equity	VHGEX	20.09	17.88	9.50	3,000	800-662-7447
Foreign Large Growth
Fidelity Advisor Diversified Intl A	FDVAX	19.02	15.08	3.83	2,500	800-522-7297
Laudus International MarketMasters In	SWOIX	19.34	11.96	0.61	2,500	800-435-4000
MFS International Growth A	MGRAX	17.54	12.00	0.59	1,000	800-225-2606
1838 International Equity	INTEX	21.02	10.72	-1.22	1,000	800-232-1838
Artisan International Inv	ARTIX	17.76	7.24	-1.49	1,000	800-344-1770
Foreign Large Blend
Fidelity Canada	FICDX	23.92	21.69	12.83	2,500	800-343-3548
Exeter World Opport A	EXWAX	25.42	13.54	9.52	2,000	800-466-3863
Thornburg Intl Value A	TGVAX	17.73	13.86	5.38	5,000	800-847-0200
Bernstein Intl Port	SIMTX	18.48	14.60	4.87	25,000	800-221-5672
Julius Baer Intl Eqty A	BJBIX	23.22	17.31	3.78	2,500	800-435-4659
Long Government
Amer. Century Target Mat 2025 Inv	BTTRX	16.38	12.69	13.06	2,500	800-345-2021
valign=”middle”>Amer. Century Target Mat 2020 Inv	BTTTX	12.44	12.23	12.71	2,500	800-345-2021
Amer. Century Target Mat 2015 Inv	BTFTX	9.09	11.21	11.87	2,500	800-345-2021
PIMCO Real Return A	PRTNX	8.71	11.02	10.85	5,000	888-877-4626
PIMCO Long-Term U.S. Govt. A	PFGAX	6.83	9.33	10.49	5,000	888-877-4626
Intermediate Government
American Century Inflat-Adj Bd Inv	ACITX	7.95	10.09	9.99	2,500	800-345-2021< /TD>
BlackRock Government Inc Inv A	CCGAX	3.92	6.73	8.52	500	800-441-7762
Vanguard Interm-Term U.S. Treas	VFITX	3.40	6.51	8.18	3,000	800-662-7447
PIMCO Total Return Mortgage D	PTMDX	4.53	5.76	7.70	5,000	888-877-4626
Sentinel Government Securities A	SEGSX	4.69	6.01	7.48	1,000	800-282-3863
Short Government
Amer Century Target Mat 2005 Inv	BTFIX	0.60	4.22	6.83	2,500	800-345-2021
Mangrs Intermediate Duration Govt	MGIDX	3.95	5.30	6.72	2,000	800-835-3879
Accessor Mortgage Securities Adv	AMSFX	3.87	4.65	6.52	5,000	800-882-9612
Marshall Government Income Inv	MRGIX	4.24	5.15	6.38	1,000	800-236-8560
WM U.S. Government Secs A	CMPGX	3.57	4.55	6.19	1,000	800-222-5852
Short-Term Bonds
Ivy Mortgage Securities A	IYMAX	4.23	5.64	7.55	500	800-777-6472
Phoenix-Goodwin S/TBdA	NARAX	4.81	7.12	7.26	500	800-243-4361
Rainier Interm Fixed-Inc	RIMFX	2.29	5.12	6.55	25,000	800-248-6314
Brown Advisor Intrm Inc A	BIATX	2.90	4.56	6.26	2,000	800-540-6807
William Blair Income N	WBRRX	2.61	4.71	6.24	5,000	800-742-7272
Long-Term Bonds
Delaware Extended Duration Bond A	DEEAX	10.03	12.69	11.73	1,000	800-362-7500
Vanguard Long-Term Bond Index	VBLTX	8.40	9.36	10.53	3,000	800-662-7447
Vanguard Long-Term Inv.-Grade Fund	VWESX	8.94	9.44	9.92	3,000	800-662-7447
Delaware Corporate Bond A	DGCAX	7.07	10.19	9.59	1,000	800-362-7500
Lebenthal Taxable Municipal Bond	LTMBX	5.53	7.95	9.58	2,500	800-221-5822
Muni National Interm. Bonds
Harris Insight Tax-Exempt Bond N	HXBAX	3.20	6.58	7.88	1,000	800-982-8782
Delaware Tax-Free USA Intermediate A	DMUSX	4.93	6.70	6.93	1,000	800-523-4640
Old Westbury Municipal Bond	OWMBX	2.59	5.98	6.91	1,000	800-607-2200
Victory National Municipal Bond A	VNMAX	3.24	5.54	6.75	500	800-539-3863
American Funds Tax-Exempt Bond A	AFTEX	4.37	5.99	6.63	250	800-421-0180
High-Yield Bonds
Pioneer High Yield A	TAHYX	6.75	11.13	12.56	1,000	800-225-6292
Westcore Flexible Income	WTLTX	10.40	12.19	10.67	2,500	800-392-2673
Calamos High Yield A	CHYDX	10.93	11.62	9.16	1,000	800-823-7386
AFBA Five Star Hi-Yld A	AFHAX	8.14	9.85	N/A	500	800-243-9865
WM High Yield A	CPHYX	11.43	13.95	8.47	1,000	800-222-5852