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The average mutual fund managed to post slight gains in the first four months of the year despite the recent market turmoil, according to Jeffrey M. Laderman, senior writer for Business Week and its ranking fund expert. In updating BW's Interactive Scoreboard of equity and bond funds for April, Laderman says last month's best performers were those that shorted the Nasdaq index. But he warns that such funds can also cause sickening losses.
Laderman was the guest of BW Online and S&P Personal Wealth in a chat on America Online on May 9. He suggests that investors could start gradually buying technology funds at current lower levels and advised holders of value funds to hang on for a turnaround. And for really nervous investors, it might be time for money-market funds again.
The following are edited excerpts of his responses to questions from BW Online's Jack Dierdorff and the online audience. A full transcript is available from BW Online on AOL at keyword: BW Talk.
Q: Jeff, what's your analysis of the current market? A: If you are really a good mutual-fund investor, you're not too concerned about the day-to-day choppiness in the market. That's why you give control of your money to a professional manager.
Q: So have mutual funds been doing better vis-a-vis the indexes, compared to last year? A: The funds have actually done pretty well, considering the market. If you look at [all] domestic funds, they are still positive through the end of April, up about 2%. If you throw in all equity funds, they are up a little less than 1%. Given the trouble in the market, I think that is pretty good.
Q: Does the credit go to astute managers? A: Some of the credit might. But remember: The first two months of the year the Nasdaq was still soaring, and many mutual funds went along with it. So even though they came down, many of those stocks are still above their Dec. 31 level. What also helped the funds is that value stocks really began to perform well in March.
Q: What are some quick highlights [of the latest BW Interactive Fund Scoreboard?]
A: Technology, of course, was the worst performer [in April], but it is still positive for the month. Real estate funds, which had done poorly for about 18 months or so, show up as the best-performing category for April. They were up 5%. They were also the only category of equity fund that was actually positive during the month.
As I said before, value funds did well in April.... [And] U.S. funds actually did better than overseas funds during the wild time of April. I think that U.S. markets are still the world's leaders, and when the U.S. market gets into trouble, the global markets get into even more trouble.
Q: I hold Windsor 11 in my retirement fund -- should I get out and go with something else?
A: Why sell this fund now? After a couple of crummy years, it is finally starting to do well. The time to get out was some time a year or so ago. But value funds are doing well, and this is a big value fund. If you have been in it this long, you should probably stay.
Q: I am a long-term holder of Franklin Templeton's foreign fund -- no movement in three years. Should I hold?
A: That fund has been disappointing, but it is not like it has lost money. It has made about 7% a year. The average foreign fund made about 16% a year for the last three years. The problem here is that Templeton is a value fund, and it applies value investing to foreign markets.... This may be the year to hang in and see if this fund gets any forward momentum.
Q: Where is fund money moving?
A: A lot of money has been moving this year into money-market funds. This might surprise you, but it makes sense. Bond funds have not been good protectors of capital, but money-market funds do the job quite well. In addition, with the Fed raising interest rates, the yields on money-market funds are now approaching 6%. Six percent with no risk looks pretty good to a lot of people who are getting nervous about the stock market.
Q: Are you in favor of no-load funds for a beginner?
A: Actually, no-loads are better for people who have some experience. When you buy a load fund, you are paying for the assistance of a financial adviser. If you are new at this, that advice might be useful. However, even beginners can buy no-load funds if they do a little bit of homework themselves. This is not rocket science.
Q: Why are index funds better? Or are they still? A: They are not necessarily better. It depends on what you want from a mutual fund. Where index funds really pay off is that they have low expenses. The Vanguard Index 500 has expenses of about 0.18% of assets. For the average equity fund, it is about 1.4% of assets.... And the sad fact is many managers can't earn that one-point plus to make it worthwhile to own a managed fund.
Q: Is this a good time to buy technology funds, given [that Nasdaq is at 3,500]? A: I think it is a good time to accumulate technology funds. I don't know that I would buy all that I planned to buy right now because [although] I think tech is a great long-term play...it is going to be rocky for a while.
Net funds will eventually bounce back, too. They are just a subset of the technology funds. I think it would be healthy if people stopped putting money in for a while and let the managers prune the portfolios back. The problem with the Net funds over the past year is that so much money was coming in that the managers had no choice but to buy stocks, whether or not they were really worth buying.
Q: Any thoughts on the closing of the Janus Olympus, Worldwide, and Global Life Sciences funds?
A: It is good that they are closing them because there is a limit to how much money any manager can run effectively, but I wonder if it is a little late to close Worldwide -- it is a $42 billion fund.
Q: What is an average amount of time to hold a fund before selling if you see it has lost or broken even over three years?
A: That's a good question. We all struggle with that every day. If the reason you bought the fund is still valid, then hold the fund. For example, if you bought an international fund to bring global diversification to your portfolio, you don't sell the fund.... If you think all funds go up all the time and are worth holding only if they go up, you should find a different way to invest.
Q: How do you rate the Firsthand Tech fund and Kevin Landis? A: Firsthand Tech Value Fund is the only tech fund that we rate A. It really is a terrific fund, and Kevin Landis has been able to balance risk and reward very well in a very volatile sector of the market.
Q: I took a large hit with the Janus Biotech fund -- do you see that as a trend?
A: Biotechnology stocks had a huge runup over the last year, almost like Internet stocks. I am not surprised that these funds are getting whacked now. If you bought at the beginning of the trend, you would still be well ahead with your money. [If] you got caught in the downdraft [and] are doing this with taxable money, you might think about taking a loss for tax purposes and coming back later in the year.
Q: For safety in older age, what do you think of funds like Vanguard's Asset Allocation or Fidelity Asset Manager?
A. I think they are fine funds, but I wouldn't attach the word "safety" to them. Most of what they invest in are stocks and bonds, and stocks and bonds fluctuate in value.... But as long as you understand that, they are fine.
Q: Jeff, what are the best-performing funds by name in the latest Scoreboard update?
A: Since the Nasdaq was down in April, the best-performing funds were those that short-sell the Nasdaq index. ProFunds Ultra Short OTC was up 17% in April. The next best performer was Potomac OTC/Short, which was up 10.6%. Before you get too excited about these funds, remember that they go up when the market goes down, and they go down when the market goes up. If you bought ProFunds a year ago, you would have lost three-quarters of your money.
EDITED BY JACK DIERDORFF
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