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A conservative strategy has been working best for mutual-fund investors, with the top performances coming from funds focusing on gold, real estate, and value. So reports Mara Der Hovanesian, markets and investments editor of BusinessWeek, who tracks mutual funds for the magazine.
However, diversified-equity funds have increased about 12% with the recent market rally, Der Hovanesian says, and investors with a tolerance for risk might do well by going into some of the battered sectors, such as technology, and into growth funds. On the subject of index funds, she notes that a study just released by Standard & Poor's shows that the S&P 500-stock index outperformed more than 60% of the large-cap equity funds over the last five years, and that there are similar results with S&P's small-cap and midcap indexes.
Der Hovanesian warns that there could be a bubble in the best-performing bond funds, such as those investing in short-term paper, and that this might be a time to lighten up on that area, although investors may well want to continue some exposure to fixed-income funds.
These were among the comments Der Hovanesian made in an investing chat presented Nov. 12 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 on AOL at keyword: BW Talk.
Q: Mara, before we dig into mutual funds, how does the overall market situation look? Three days of retreat and a modest uptick today, after a very nice rally.
A: The big picture is that there's still a lot of profit-taking after the markets made big moves. Things are still volatile. There's no clear trend in sight, despite a strong market over the past six weeks or so.
Q: Have equity funds recovered along with the rally?
A: They have for the last four weeks or so. For instance, U.S. diversified funds are up a nice 12%, about in line with the market. But that hasn't gone far in relieving investors from huge losses so far this year.
Q: Could you tell me what you think of the Janus family of funds?
A: The Janus family of funds continues to suffer as growth investing and momentum investing have lagged behind a value style of investing. They still, however, have some strong long-term offerings, and once the market favors growth stocks, they'll start to see some better performances.
Q: We have watched our American Century Ultra fund grow and wane for years. What now?
A: The future for the Ultra fund is that it's an aggressive growth fund. You have to stack up where you think the growth will be in the next couple of years. It's a fund with a long history, with annual returns of about 10%, so you could do worse.
Q: What do you think of Vanguard's Windsor II fund?
A: Oddly, Vanguard's actively managed funds, despite their conservative stance, have not been performing that well. For instance, that fund is down 16% so far this year. And sure, that's beaten the overall market, but managers have a taste for buying really beaten-down issues, and with the market continuing to fall, they've gotten into their own trap this year. But as a long-term holding, it still has a decent track record -- it just hasn't been doing as well as you'd think in the current environment.
Q: RBCGX
(Reynolds Blue Chip Growth) -- great 15-year run, but down 60% the last two years. Any thoughts?
A: The managers of the Reynolds fund really got the wind at their backs with the runup on tech stocks. There's no real evidence that before the tech boom they had any particular stock-picking prowess, despite the long tenure of manager Fred Reynolds. The 10-year annual return of that fund is less than 5%. So, for a blue-chip fund, it doesn't rank high among its peer group.
Q: Your thoughts on Fidelity's Dividend Growth Fund? Any other Fidelity funds that you like?
A: Among Fidelity's halfway-decent funds this year are some of their biggest funds, strangely enough: Contra Fund, Puritan, and Low-Priced Stock. The dividend fund's manager has a good reputation -- conservative and averse to tech -- which has helped him in the long run, although this year he has lagged behind the three other funds I've mentioned, with losses of almost 20% so far. Much of that has to do, it seems, with an overdependence on financial and health-care stocks.
Q: While we're on Fidelity, what do you think of Fidelity Magellan?
A: The fund has managed to keep pace with the benchmark, but it's pretty much a middle-of-the-road offering that keeps pace with the market for better or for worse. I've never known the manager to make outsize bets in any particular stock or sector, whether it has been during boom or bust times.
Q: Fidelity Select Electronics was a moneymaker. Will it come back?
A: If the investments that the manager is mandated to buy, which is a very narrow slice of the tech market, go up, then absolutely. But all of the Fidelity Select Funds, such as the electronics fund, should be treated as fringe investments with money that investors can gamble on.
Q: Here's one about two havens in recent storms -- should I buy gold funds now? Or REIT funds?
A: Both of those sectors have performed tremendously well in the last year, and my only caution is that, in March, 2000, tech and telecom were the two best-performing sectors. And so the question investors would have to ask themselves is, if [they're] buying the best-performing stock or sectors, and if [they're] pacing performance and buying high rather than selling high.
Q: What is your opinion of Buffalo Small Caps (BUFSX
)? Have smaller-cap funds been doing as well as the stocks themselves, relative to larger caps?
A: Small-cap growth stocks and growth funds have been the worst performing slice of the market. The value end of the spectrum, however, which is an area that includes undervalued neglected stocks that don't come up on Wall Street's coverage, has performed (strangely enough) far better than large-cap or midcap counterparts. Small-cap value funds have lost 12% this year, vs. a 28% loss in small-cap growth funds. That said, the Buffalo Small Cap fund is an anomaly -- it's up about 60% since its 1998 inception, and managers tend to hold their stock for a long time (they don't trade). The fund also has low expenses, so that helps to keep the integrity of the returns.
Q: May I have your opinion on Oppenheimer's Main Street Growth & Income Fund?
A: This is a large blend fund that isn't reliant on the manager's ability to pick stocks, but rather [on] computer models. It's an expensive fund because it's broker-sold, so if you're going to buy the fund, you're hoping for outsized returns. In the long run, investors who have hung in have gotten about an annualized return of 12% -- which isn't too bad. Though they've got a good reputation, the managers have been on the fund only since 1998.
Q: What's your take on Fidelity OTC or similar funds?
A: Another one of Fidelity's large-growth offerings. Manager Jason Weiner loves tech and doesn't have a problem with making big bets on single stocks -- he's sort of the opposite of a Fidelity Magellan manager. Despite his taste for tech, he has managed to lose less than the Nasdaq. [The fund has] also got a 10-year annualized return of 8.5%. But if you had invested five years ago, you wouldn't have made a penny.
Q: Your opinion on the American family of funds? Once known as a conservative fund family.
A: I don't think that reputation has changed. They're one of the least press-friendly fund families, so they don't put out a lot of their fund managers to the media for interviews. But their largest funds are beating the market despite their size. For instance, the EuroPacific Growth fund has lost 14% this year and is far ahead of its peer group. It's in the top decile for performance over the past decade. Many of the funds are team-managed and tend to have long-standing managers and low expenses.
Q: What's the picture on international or emerging-growth funds?
A: Among the better-performing funds in that class, Oakmark International Small Cap has done well over the last several years. Eaton Vance has an Asian fund that has done very well, as has Fidelity Pacific Basin. In terms of emerging markets, ETFs [exchange-traded funds] or I-shares are the best way to get into particular individual markets like Korea or Taiwan because of costs. Also, Oppenheimer Developing Markets has a good long-term record in investing in emerging markets.
Q: What do you think of short-term bond funds at this time? Would you consider this a bad time to put money into bond funds, given that interest rates are so low?
A: I think the concern now is that there may be a bubble in terms of bond performance. The shorter-duration funds are the ones that have tended to outperform. For instance, year to date, short-term government Treasury funds, and even investment-grade funds, have far outperformed longer-term corporate debt and Treasury funds by a mile.
What investors should probably be doing at this point is lightening up on the outperforming bond funds. That said, if there aren't any fixed-income mutual funds in their portfolio, they probably should seek to balance returns with some kind of fixed-income investment.
Q: How about the health-care sector? And the Vanguard Health Care Fund?
A: Health care, like the science and tech or telecom-sector funds, has been really battered this year -- down 26%. But for investors with a taste for contrarian investing, it might be a good time to buy this out-of-favor group. Vanguard funds are usually an excellent choice based on cost alone. That fund has an exceptional long-term record, and it has a diversified investment base, so it buys pharmas as well as biotech (traditional drug stocks and nontraditional biotech). Its 10-year annualized return is 19% -- one of the best in its class.
Q: Do you feel managed mutual funds are overrated? Index funds don't outguess the market.
A: It just so happens that S&P released a study today indicating that the S&P 500 outperformed more than 60% of all large-cap funds over the last five years. During the bear market, that outperformance rate is 54%, still showing that indexes are favored. Similar results are found by measuring mutual funds by the S&P MidCap 400 index and SmallCap 600 index.
Q: Do you see junk-bond funds moving up from here after a great two-week bounce?
A: Many bond managers are very bullish about the high-yield sector, especially since they've been a lousy performer for a longer stretch. And yield spreads against Treasuries are quite wide. So as a longer-term investment, next year, perhaps along with a recovery, some of the higher-quality junk is expected to perform well.
Q: So at this stage of the market, what are the best performers? And any guidance on what types of fund would be the best buys?
A: The best performers have been the defensive strategies, including gold, real estate, and value-oriented investing. The strategy going forward appears to favor a continued conservative strategy. However, those with a tolerance for more risk could probably find the super bargains in battered growth and sector funds.
Q: Finally, Mara, can you point us to BusinessWeek's trove of mutual-fund information on the Web?
A: Sure. On BusinessWeek Online, there's a monthly update of performance figures and an interactive screening tool, so investors can do their research about what to buy [on BW Online's Investing page]. From the main page, investors should click on the Investing tab, under which they can hit the Funds link, and there you'll find Fund Screener, which screens 11,000 funds, in addition to the elite group of S&P Select Funds, which are chosen by analysts for consistent high-quality performance.
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