"An Opportune Time for Funds"


As the economy edges into a recovery, the best opportunities in the world of mutual funds lie in growth funds, according to Philip Edwards, managing director of Standard & Poor's Select Funds Group. He points out that small- and mid-cap growth funds tend to lead the way in such times.

Edwards names the T. Rowe Price Mid-Cap Growth fund or the ABN Amro Veredus Aggressive Growth Fund as two possibilities in that category. They're among the funds in S&P's Select Funds list, which includes 35 funds picked both for their performance and the quality of their management.

Even though some analysts caution against using a buy-and-hold strategy in the current market, Edwards feels it's a good time for mutual funds because stock selection is paramount, and fund managers are professionals at that skill. Among the managers he thinks highly of now are Spiros Segalas of the Harbor Capital Appreciation fund, Eric McKissack of the Ariel Appreciation fund, and Bob Perkins of the Berger Small-Cap Value fund.

These were some of the points Edwards made in a chat presented Sept. 10 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: Phil, the week started better on the market. Can we look for more improvement soon?

A: While S&P believes the market has bottomed, we're not ready to call for a strong upswing. We need to see more economic stability.

Q: What can you tell us about mutual funds in general now? Equity funds still down? What looks good?

A: In general, this may be a great buying opportunity, especially for growth funds. Equity funds are still down, and as the economy improves and people have more confidence in earnings, we think that the market will improve. [On what looks good:] S&P has always believed in a diversified portfolio. You never know when the market is going to turn or in what direction, so it's best to be participating in different parts of it.

Q: Your thoughts on the Vanguard Health Care fund?

A: A great fund with very strong long-term performance and a very experienced manager. My only concern is the large asset size.

Q: Your opinion on Janus funds -- specifically, Venture, and the Janus fund itself?

A: I think you need to own only one Janus fund. My choice would be Growth & Income, since it's less aggressive. If you have a more aggressive appetite, then the Janus fund would be a good choice.

Q: What do you think about quant funds like Hennessy Cornerstone Growth?

A: I think that quant funds work well for periods of time but don't work well in all market conditions. I haven't seen a quant fund that has been consistently strong in these volatile markets.

Q: Why should investors put money into funds these days, as many think the buy-and-hold strategy is over for now?

A: I think we've entered a period where stock selection counts. And I think professional management can be useful in stock selection. As a result, I think it's an opportune time for funds.

Q: What do you think about Vanguard Growth & Income fund?

A: This is a decent fund that has done slightly better than its style peers and the S&P index. And, typical of Vanguard funds, it has a very low expense ratio. I'd stick with it.

Q: Your opinion on Clipper? How about Clipper's heavy holdings in Tyco (TYC)?

A: Clipper is an extremely concentrated fund that has done very well over the last three years. However, like any concentrated fund, if it makes a bad stock selection, then it's going to suffer. As of the middle of 2002, Tyco was its largest holding and represented 8.5% of assets.

Q: Your opinion on actively managed vs. index funds?

A: I think both have merit. I would see reasons for including both in a portfolio.

Q: I have holdings in T. Rowe Price Real Estate -- what is the outlook for REITs for the next 12 months?

A: I'm not good at forecasting -- however, it appears that REITs have done very well, and it may be time to take some profits off the table from this sector.

Q: What do you think of gold funds GOLDX

(Gabelli Gold) and FSAGX

(Fidelity Gold)?

A: The Gabelli fund has done extremely well over the last 18 months. Similar to real estate, it may be time to take some profits off the table, as gold funds have a tendency to have long periods of underperformance. The same story with the Fidelity fund.

Q: Where can we find the list of your S&P Select Funds Group?

A: The list can be found at www.standardandpoors.com. From there, you'll have to go to the Products & Services menu. You'll choose Mutual Funds from there -- that will take you to the list.

Q: To follow up on that, many people associate S&P with rating stocks and bonds, but not funds. How long have you been following funds, and what's the approach you take?

A: We've been following funds since 1985, and our approach is to combine an analysis of performance with an analysis of the management running the fund. We have to gain confidence in both aspects before a fund can be designated as "Select" by S&P.

Q: So how many funds get selected for Select?

A: About 35 now. We intentionally keep the list short to make it manageable.

Q: How about Federated Kaufmann? It has changed character over the past few years.

A: The fact that the fund has changed character is a concern. An important issue to us is style consistency. If the fund hasn't been consistent to its style, then you're not sure what you've bought. Also, the fund has just over $3 billion in assets, which is extremely large for a small-cap fund.

Q: I need to open a Roth IRA for my 12-year-old son. What type of fund would you recommend, generally?

A: I would recommend a blend fund, and either a mid-cap or large-cap blend fund. Since your son is young, you may want to take a more aggressive stance with a mid-cap fund such as AIM Mid-Cap. Or, if you want to take a less aggressive position, a fund such as Pioneer Fund would be appropriate.

Q: Who are some of your favorite managers these days?

A: I would say that in the growth area, Spiros Segalas remains strong. On the value side, Eric McKissack is very good, as well as Bob Perkins.... Segalas manages the Harbor Capital Appreciation Fund (HACAX). McKissack manages the Ariel Appreciation Fund (CAAPX). Perkins manages the Berger Small-Cap Value Fund (BSCVX).

Q: What foreign funds (stock and bond) would you have on your Select list?

A: In the international area, we have four funds: Artisan International (ARTIX), EuroPacific Growth (AEPGX), Julius Baer International Equity (BJBIX), and finally ING International Value (NIVAX).

Q: What are some of the favorite funds?

A: I like the Harbor Capital Appreciation (HACAX), Pioneer Fund (PIODX), and Van Kampen (ACSTX). I also like the T. Rowe Price Mid-Cap Growth Fund (RPMGX) and the Berger Mid-Cap Value Fund (BEMVX).

Q: What is your opinion of Fidelity Dividend Growth? Been in it for years.

A: This fund has had some problems recently in its performance, as it has fallen within the large-cap value peer group. Also, its track record has become less consistent since the manager took over in 1997. It might be time to consider an alternative.

Q: What fund family shows up most often among the Select 35?

A: Two families: American Funds and ABN Amro (formerly the Alleghany Fund).

Q: Which of the American [funds] do you see with the most upside? I'm in a hurry for the upside.

A: American fund managers are not in a hurry, so you're not going to get a quick hit from any of their funds. However, when the market recovers, Growth Fund of America (AGTHX) should do well.

Q: What do you think of the Deutsche Equity 500 Index/Premier fund?

A: It looks to track the index very closely with a very low expense ratio. My only hesitation is if they're subsidizing the expense ratio, because it's so low. If you've got $5 million to invest, it looks like a good deal (since the minimum investment on the Premier share class is $5 million).

Q: You suggested earlier this might be an opportune time for growth funds -- do you mean large-cap growth? Is that the best place to look now?

A: Coming out of a recession, mid- and small-cap growth funds tend to lead the way. So funds such as T. Rowe Price Mid-Cap Growth (RPMGX) or ABN Amro Veredus Aggressive Growth Fund (VERDX) would be candidates.


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