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In an economic recovery, the best mutual funds typically are those investing in small- and mid-cap stocks. So says Philip Edwards, managing director of Standard & Poor's Select Funds Group, which screens funds and has a list of 34 funds it ranks highest. Funds of that type on the list, he adds, are T. Rowe Price Mid-Cap Growth (RPMGX ) and the Baron Growth Fund (BGRFX ).
For the long term, Edwards says value funds tend to outperform growth funds, and he thinks value funds should be part of a diversified portfolio. He cites Dodge & Cox Stock Fund (DODGX ), as well as Janus Mid Cap Value (JMCVX ) and the Ariel Fund (ARGVX ).
Edwards is cautious about bond funds because of the likelihood that interest rates will rise. If an investor is interested in income, he suggests concentrating on short-term funds or on a fund focusing on mortgages, such as the Vanguard GNMA Fund (VFIIX ).
These were some of the points he made in an investing chat presented Apr. 29 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. A full transcript is available from BW Online on AOL at keyword: BW Talk.
Q: Before we go into specifics about mutual funds, how do you see the broad market? Are we in for better days? A: Boy, I certainly hope so! Standard & Poor's investment-policy committee continues to forecast about a 10% gain for the S&P 500 this year.
Q: And what's the big picture on mutual funds? Are the big equity funds gaining any of their lost ground back? A: Some of the funds are, but it's uneven at this point because I think the fund managers are as perplexed as anyone about the market.
Q: Tell us a little about S&P Select Funds -- how many, how you pick, etc. A: We have about 34 Select Funds. Each has met our rigorous standards for both consistency of performance and quality of management. Each fund has been judged by experienced analysts to have met these standards. As a result, it's an elite group.
Q: My elderly parents are looking for safety with a little better return than a money market. Is it too late to buy a good short-term municipal-bond fund? Any of those on your list? A: No. I think the key to this is "short-term." As interest rates rise, you want to be as short as possible to minimize the loss of value. An alternative may be a mortgage fund, such as the Vanguard GNMA Fund (VFIIX ). This fund may not fall as much as many of its peers because it's focused on mortgages.
Q: How about junk-bond funds? A: A lot of money is going into junk-bond funds now. If the economy recovers, as anticipated, this could be a very good investment, as these funds tend to do well in an improving economy.
Q: Any thoughts about whether Janus can regain its lost art of stock gains? A: If the market recovers, then we should see a recovery in the Janus funds, especially the more aggressive ones like Janus Twenty (JAVLX ) and Enterprise (JAENX ). However, there seems to be a good deal of personnel change occurring at Janus, and we hope this won't be a distraction.
Q: Your opinion on Janus Fund and Janus Twenty? A: Janus Twenty (JAVLX ) is obviously an aggressive fund. It has shown some signs of life in the first quarter of this year and toward the end of 2002. If you're prepared for the volatility and believe that the market will recover, this actually may be an interesting purchase.
The Janus Fund (JANSX ) has muddled along under its new manager, Blaine Rollins. I would be a little bit more hesitant toward this fund until Rollins has had a chance to manage through a recovery. Of the Janus Funds, Janus Growth & Income (JAGIX ) remains on our Select Funds list, as this fund has done relatively well in all market cycles.
Q: What are your thoughts on value funds for the future? A: The studies show that over the very long term, value investing beats growth investing. So I do think that value funds are an important part of an individual's portfolio. I like the Dodge & Cox Stock Fund (DODGX ), as well as Janus Mid Cap Value (JMCVX ) and the Ariel Fund (ARGVX ), which focuses on small-cap value stocks.
Q: Where would you invest for income now? Any income funds on your list? A: I would not invest in any long-term fixed-income funds now. I think the chance of interest rates going up are better than them going down. And as a result, this sector may be peaking. As a result, I'd find a short-term fixed-income fund or a mortgage fund in which to invest. Vanguard has some good short-term funds, as well as the GNMA Fund.
Q: What type of fund do you see as doing best in the market now (and any examples from the Select list?). A: Typically, in an economic recovery, the small- and mid-cap growth funds tend to do well. T. Rowe Price has a good mid-cap growth fund (RPMGX ) that is a Select Fund, and the Baron Growth Fund (BGRFX ) is a Select Fund in the small-cap growth category.
Q: What's your opinion regarding load vs. no-load mutual funds? A: If you're going to invest for long periods of time, let's say five or more years, then -- only then -- would I consider paying a load. However, in most cases, there are always good no-load alternatives.
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