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|  | NOVEMBER 21, 2003
Funds: "A Minefield without a Map" That's how S&P's Philip Edwards describes the scene for investors amid the trading scandals. But he still sees some strong choices "Until you know what direction to head, it's a little bit risky moving anywhere," says Philip Edwards, managing director of mutual-fund research for Standard & Poor's, in counseling patience for mutual-fund investors. The present situation with the developing scandals over trading is "a little bit like being in the middle of a minefield without a map," he comments. However, Edwards advises investors not to paint all mutual funds with the same brush, and he suggests questions to ask in selecting a fund, about such things as quality of sponsorship, management, and performance. Among the funds S&P likes, he reports, are the Growth Fund of America (AGTHX ) in large-cap growth funds and the Dodge & Cox Stock Fund (DODGX ) in large-cap value. S&P also recommends the American Century Small Company Fund (ASQIX ). If an investor is thinking about switching out of a mutual fund, Edwards cautions that care should be taken in picking a fund to switch into. In some cases, he notes, more information may be needed before making a change. These were among the points Edwards made in an investing chat presented Nov. 18 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 complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk. Q: Before we delve into the world of mutual funds, how does the market look to you, Phil, after four days of declines? A: It looks like people have some concerns, ranging from something as major as terrorist threats to something as broad as the economy. However, S&P believes that the economy is poised for growth, and we expect the market to continue to climb through 2004. Q: How have the recent headlines over mutual funds and trading scandals affected fund investing? A: I think investors have lost confidence, and rightfully so. Some of the revelations have been quite startling and need to be addressed by the industry. However, we can't paint the entire industry with the same brush. In a nutshell, people need to be careful where they invest. Q: You said because of the scandals people should invest carefully -- can you give us any guidelines? A: Yes. There are five questions that investors should ask. First, how credible is the fund sponsor? Second, who's managing the fund, and how long have they been doing it? Third, what's the style of the fund, and are you comfortable with it? Fourth, what's the fund's expense ratio, and is it competitive? And fifth, has this fund exhibited consistently strong performance? Q: What guidance are you at S&P giving investors in this confusing situation? A: Boy, that's a great question. We're generally counseling patience. It's a little bit like being in the middle of a minefield without a map. Until you know what direction to head, it's a little bit risky moving anywhere. However, I understand that there's a lot of emotion to investing, and if people feel they must move, they should do their homework before doing so. Don't just move on headlines or snippets of information. Q: As we discuss these troubles, are you seeing net redemptions out of any of the funds involved? Or from funds generally? A: In general, money is flowing into stock funds at a rate of about $15 billion to $20 billion a month. However, some of the fund groups, such as Putnam, Strong, and Janus, are experiencing redemptions. However, I don't think you could yet claim it to be a run on the bank. Q: You gave us some questions prospective investors should ask -- what funds does S&P recommend now in answer to such questions? A: Well, the Growth Fund of America (AGTHX ) is a very good large-cap growth fund. The Dodge & Cox (DODGX ) is an equally strong large-cap value fund. In small caps, American Century has a strong offering in its Small Company Fund (ASQIX ). We're very confident in each of these funds. Q: How do you feel about the Vanguard group of funds? A: I feel very good about them. They have probably the best index funds, and they also have a strong lineup of actively managed funds. They are one of the lowest-cost fund groups in the nation. Q: How do you feel about the Eaton Vance Income Fund of Boston (ECIBX )? A: The performance of this fund has generally been strong, typically ranking in the top half of its peer group of fixed-income funds. The expenses are very reasonable, and the management team seems very seasoned. It seems like a good choice if you're looking for this type of income fund.
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