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With the markets still volatile and the strength of the recovery somewhat uncertain, it pays to diversify in your mutual-fund investing. However, it may be time to go into small- and mid-cap growth funds at this stage of the rebound, according to Philip Edwards, managing director of Standard & Poor's Select Funds Group.
Edwards presides over a group of analysts who screen mutual funds for consistency of performance and quality of management. The result is a current list of 35 Select Funds, which can be found at www.standardandpoors.com. Funds on the list include Harbor Capital Appreciation, Janus Growth & Income, Berger Mid Cap Value, and Legg Mason Investment Grade Income.
For recent performance, Edwards says small- and mid-cap value funds have done the best. He doubts that Internet funds will ever return to anything like the peaks they reached, though he acknowledges that picking the right time to sell them can be a tough call.
These are just some of the answers given by Edwards to questions from BusinessWeek Online's Jack Dierdorff and the audience in a chat presented Apr. 16 by BW Online and Standard & Poor's on America Online. Following are edited excerpts from the chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Phil, before we get into mutual funds, how about that recovery in the stock market today? Dare we hope for more?
A: The market has been volatile, but signs of a recovery appear to be on the horizon. So we hope for more strength in the market as the year progresses. However, the recovery does seem fragile, and it wouldn't take much to derail it.
Q: Let's jump straight to an early-bird question from the audience: How about VIGRX
(Vanguard Growth Index)?
A: The growth index has been hit hard by the decline in tech and similar growth stocks. If you believe in growth and have a long-term investment horizon, this may be a good buying opportunity.
Q: Is it a good time to invest in an S&P index fund, or would it be better to stay in a small-cap fund?
A: In an economic recovery, small- and mid-cap stocks usually lead the way. As a result, it may be a good idea to be positioned in small- or mid-cap growth stock funds.
Q: What do you think of Harbor Capital Appreciation (HACAX
) in a Roth IRA?
A: It's a great fund! And it's on our Select list. It has had a tough time recently because it's very growth-oriented. But we have great faith in the managers, and we expect this fund to recover when the market recovers.
Q: What do you think of the conservative Janus funds: Janus Growth & Income, Core Equity, and Balanced? Does Janus really know what they're doing, or were they just lucky to play the tech boom?
A: I really like Janus Growth & Income. It is on our Select list. It is a diversified fund that benefits from Janus research but doesn't take as much risk. The Janus Core and Balanced funds are run by the same person, who also is very sensitive to risk. And all of these funds often have been overlooked in the Janus offerings.
Q: What do you think of Vanguard's Capital Opportunity fund in this environment?
A: The fund has had a great track record. However, the minimum investment is $25,000.
Q: What about oil funds, with all the Middle East uncertainty?
A: I don't know of any funds that are strictly "oil funds." However, there may be some funds that invest in natural resources or energy. But these are very risky plays, and I wouldn't allocate a large amount of assets to them.
Q: Speaking of what turned out to be risk, do you see any hope for Munder NetNet to come back, or should I exit?
A: None of the Internet funds in my opinion are ever going to reach the peaks they once experienced. It's hard to tell when the best time is to exit.
Q: How do you feel about the Dodge & Cox family of funds?
A: Excellent funds. It's team-managed by very experienced people. However, I would pick one of the funds to invest. Otherwise, you may get a large overlap of holdings.
Q: What ETFs [exchange-traded funds] would you recommend for a diversified portfolio in this market for a 65-year-old couple?
A: I'd consider an S&P 500 Index fund as well as an ETF. It depends on how much you plan to invest and how often you're going to access the funds. ETFs can be costly if you want to have frequent access to the investment. Otherwise, an S&P 500 ETF is a great long-term investment.
Q: Phil, let's pause so you can tell us a little about S&P Select Funds -- how you select, and how many there are -- plus where to find the list online, of course.
A: S&P looks for two important qualities in funds: consistency of performance, as well as the quality of management. Only after in-depth research will our analysts gain the confidence to recommend a fund. The list is very tight at only 35 funds. So the standards are very high. The list can be found at www.standardandpoors.com -- and look for "Funds" under the "Products & Services" tab.
Q: With the success of the Buffalo Small Cap fund last year, do you believe it can continue to outperform?
A: It has a short but stellar track record, which has led to a huge growth in assets. My only concern revolves around the rapid growth in assets and whether the performance can be sustained with almost $1.3 billion of assets.
Q: What do you think about Pioneer Small Cap Value (PIMCX
A: This fund has had a great track record since 1999 and still has a relatively small asset base. However, expenses are high. It may be a good candidate.
Q: Phil, looking at mutual funds broadly, what have been the best performers in this volatile market?
A: Cash! No, really, the value sectors recently have been performing well, especially the small- and mid-cap areas.
Q: How about your thoughts on Tweedy Brown Global Value and Weitz Value?
A: The Weitz series has had a very good track record. If you're not worried about style consistency, then this fund may be a good choice. Tweedy Brown Global also has had a good run. However, it is not likely to perform as well in a growth market.
Q: As you suggested earlier, might it be almost time to go for growth again, despite the good showing of value?
A: Absolutely. Now is an opportunity to get some good buys on some great managers. For example, the Harbor Capital Appreciation Fund (HACAX
Q: Do you think the huge asset base of Fidelity Low-Priced Stock fund (FLPSX
) will become a liability for it?
A: Oh, yeah. At $15 billion, it will be difficult to emulate the historic return pattern. I have to wonder if it's still a true small-cap fund.
Q: Is it a good or bad time to buy a bond fund or a total bond fund, and which would you prefer?
A: Bond funds are likely to suffer in a rising interest-rate environment. If you want to invest in a bond fund, I would go for a shorter maturity, which would be less affected by an increase in interest rates.
Q: You mentioned managers a minute ago -- who are some of your favorites, and their funds?
A: We just added a fund to our Select list, Berger Mid Cap Value (BEMVX
). This is run by the Perkins brothers, who are great stock selectors. Another favorite is the Growth Fund of America (AGTHX
). That's run by a team of experienced analysts.
Q: Which Vanguard funds would you recommend for an aggressive retirement plan?
A: I would recommend the Growth Index and the Mid Cap and Small Cap Index funds. I would not recommend the Total Market index because the large-cap component overshadows the small- and mid-cap components. I would also include some international exposure, such as the European Stock Index.
Q: Any comment on Legg Mason funds?
A: Legg Mason Value Trust is well-known and a great fund. However, not as well known is Legg Mason Investment Grade Income fund (LMIGX
). This is a very good bond fund. Both of these funds are on the Select list.
Q: Do you watch any sector funds? If so, which are doing best?
A: We don't have any sector funds on our list at this point. I can say that consumer staples, energy, and materials are the best-performing sectors within the S&P 500.
Q: What fund family is best represented among the 35 names in your Select Funds list?
A: ABN AMRO has three funds on the list. And while not largely represented, I also like American funds.
Q: How do you rate the SEI S&P 500 fund?
A: For an S&P 500 index fund, it's hard to beat Vanguard because of the low expense ratio. The SEI expense ratio is 0.4%, and the Vanguard expense ratio is 0.18%.
Q: Here's a good question for summing up -- what category of funds is most appropriate right now? Large value, small growth, etc.?
A: At this point, assuming an economic recovery is under way, I'd be looking at small- and mid-cap growth funds. However, not knowing when the markets are going to cycle means that it's always good to have a diversified portfolio of large and small, as well as growth and value funds.