Funds for the Long Term


Like everyone else focused on growth stocks, mutual-fund investors have been hit hard by the tech-stock collapse. But funds have fared slightly better than the S&P 500, and a few are standouts, according to Philip Edwards, managing director of Standard & Poor's. He's responsible for the S&P Select Funds listing.

Edwards points out that the average large-cap fund was down 7% in 2000, compared to a 10% slide for the S&P 500. If you want to limit your exposure to tech, you should bear in mind that technology stocks can make up as much as 40% or more of a large-cap fund's holdings.

S&P screens mutual funds for consistency of performance and quality of management, and comes up with a list of recommended funds for the longer term. Among the current favorites are Selected American Shares, Royce Low-Priced Stock Fund, and Tocqueville Small-Cap Value Fund (up 14% last year). Edwards also mentions that the Legg Mason Value Trust Fund has beaten the S&P 500 for 10 years in a row.

These comments came in a Jan. 2 chat presented by Business Week Online and Standard & Poor's on America Online. Edwards was responding to questions from the online audience and from BW Online's Jack Dierdorff. Edited excerpts from the chat follow. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.

Q: Phil, how have mutual funds generally been doing in comparison to the overall market? Any better -- or worse?

A: This year, they've been better. But it's all relative in a bad market. If you look at the broad S&P 500 composite, it was down about 10% in 2000, whereas the average large-cap fund was only down about 7%.

Q: Tell us a bit about S&P Select Funds and how it works.

A: S&P evaluates funds looking for two things: consistency of performance and quality of management. And only those funds that pass those two hurdles receive the exclusive Select Fund designation.

Q: Which funds rate tops in S&P's screen?

A:Last year, large-cap growth funds were hammered. For example, Janus 20 (JANVLX) was off 32%. But this is to be expected from aggressive technology-laden funds and isn't a reason to run away from them. It does show, however, the importance of diversifying to funds such as Alliance Growth & Income (CBBDX) and Selected American Shares (SLASX), as well as some small-cap funds such as Royce Low-Priced Stock Fund (RYLPX). There's one other fund that isn't commonly known: Tocqueville Small-Cap Value (TSCVX). They're a smaller group with a small management team. It was up 14% last year.

Q: Where is the Select Funds list available?

A: Wonderful question. You can get it at www.standardandpoors.com/onfunds

Q: What are your recommendations in the technology area?

A: My first recommendation is to check the technology exposure in your existing funds. What a lot of people don't realize is that they already have a significant technology exposure. If you own a large-cap growth fund, it's likely that it has 40% or 50% of its assets in technology stocks. There is a global fund that is technology-oriented called New Economy fund (ANEFX) (American A funds). There's also an Eaton Vance Information Age fund (EMIAX) that also has a global technology perspective.

Q: My divorce was final recently. I've been given half of my ex-husband's retirement fund. Where would be the best place to invest these funds?

A: My first recommendation would be to contact a financial adviser. I think that it's a difficult question to answer because it depends on your age, risk tolerance, and investment needs. As a very general response, I would diversify the investments with 50% to 60% in large-cap funds, another 20% to 30% in small-cap funds, and the rest in fixed income.

Q: What do you think of index funds?

A: I think that for large-cap investments, index funds are a good idea. For smaller and midsized investments, active management is better.

Q: What type of fund, or fund family, looks best for the new year?

A: I like Capital Research, which provides the American funds. They've got a rich research team, strong portfolio managers, and consistent results. They have nine funds on our Select list.

Q: Are there bond funds that look good now?

A: Absolutely. The volatility in the equity markets has raised interest in bond funds. And there are several good funds on our list -- for example, Legg Mason Income Fund (LMIGX), as well as Strong Corporate Bond Fund (STCBX).

Q: I've read that Fidelity Income & Growth Fund (FGRIX) may open back up. Any thoughts on this fund?

A: Fidelity has a tendency to rotate managers quickly, but they do have a deep bench. That's a very large fund, and you should be wary of larger funds -- you may be just as [well off] in an index fund.

Q: I'm 32. I have $5,000 for a fund for the long term -- any recommendations?

A: I would go with the Selected American Shares (SLASX). That's a great fund with consistent performance. Or if you want a more aggressive take, Invesco Blue Chip Growth (FLRFX). And when I say consistent performance, I mean over many, many years -- at least 10 years.

Q: What small-cap funds make your Select list?

A: On the growth side, there's Wasatch Small-Cap Growth Fund (WAAEX), which I believe is still open, as well as Invesco Small-Cap Growth Fund (FIEGX). And on the value side, there is Skyline Equities Fund (SKSEX), as well as the Royce Low-Priced Stock Fund (RYLPX).

Q: Should we get out of technology funds altogether?

A: I think diversification is the key. You need to have exposure to both growth and value funds as nobody has been smart enough to consistently time the market. So I wouldn't avoid technology, but I'd make sure that it's balanced in the portfolio.

Q: What is happening with the Janus group?

A: It's a very aggressive group -- they invest aggressively. And aggressive stocks were killed in 2000. As a result, the Janus funds aren't doing as well. It doesn't mean that people should avoid Janus. I think that the performance is understandable, given the investment style. As a matter of fact, we have three Janus funds on our list: the Janus 20 Fund (JAVLX), the Janus Fund (JANSX), and the Growth & Income Fund (JAGIX). I believe that Growth & Income is still open.

Q: What about Legg Mason Value Trust?

A: Excellent fund. That fund has beaten the S&P 500 for 10 years in a row. Bill Miller is a strong manager, and we're very impressed with this fund.

Q: One of your list's two criteria is management. In S&P's view, who are some of the other top managers?

A: Some of the top managers in our view are Trent May at Invesco, Robert Gardiner at Wasatch, and Bob Turner at Turner Funds.

Q: What is your opinion on American Growth Fund of America?

A: Good fund. It's on our Select list. It has multiple portfolio managers, as well as a strong research team. It was one of the better growth funds in 2000, up a little over 7%, so I'm very impressed with this fund.

Q: If there is indeed a severe economic slowdown, will there be a redemption crisis for the funds?

A: Hard to tell. It appears to me that a longer-term investment mentality is taking hold. And while I'm sure that there will be redemptions, I'm not sure it would reach crisis proportions. However, this is a potential exposure for a firm like Janus, which had so much money flow in over the last couple of years.

Q: Is there still a net inflow into mutual funds?

A: I believe that it has been close to even, meaning that inflows matched outflows. There has been more [activity] in bond and money [market] funds.

Q: How do we keep fund managers true to the fund's objectives?

A: Good question. That's one of the things that we look for in the Select Funds. To be a Select Fund, a manager has to put your money where his mouth is. He/she has to do what they say they're going to do. Any deviation will raise concerns for us.

Q: Do you compare notes at S&P Select Funds with what other groups like Morningstar come up with?

A: No. That's because our Select list takes a longer-term outlook than do the Morningstars. They're based entirely on performance statistics, and as a result, have an average life of under six months. We want the Select Funds to be longer-term investments.


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