Business Week's Feb. 6, 1995, issue featured the annual Mutual Fund Scoreboard, rating the performance of almost 900 equity funds. The editor of the Scoreboard, and author of the Cover Story accompanying it, was the guest at this conference: Jeff Laderman, senior writer for BW.
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OnlineHost: Good evening and welcome to Business Week Online's weekly conference. Tonight we bring you BW on the Best Mutual Funds, drawn on the current issue's annual Mutual Fund Scoreboard, which rates the performance of almost 900 equity funds--and supplies a rich statistical portrait of each.
Our speaker is Jeffrey M. Laderman (JeffBW), senior writer for Business Week and mutual-fund maven extraordinaire. Jeff, who covers both the stock market and mutual funds for BW, is a graduate of Rutgers and the Columbia Graduate School of Journalism. He has been on the BW staff since 1982.
Jeff is the author of Business Week's Guide to Mutual Funds. The moderator of tonight's discussion is Jack Dierdorff (JackBW), consulting editor of BW Online.
JackBW: Hi, Jeff, and welcome to all of you on AOL. Jeff, I have the first question for you. Last year was a period of treading water for the stock market, and taking gas for the bond market. How did mutual funds do?
JeffBW: They disappointed a lot of shareholders, but in reality, they didn't do that bad. The average fund was down 1.8%
Question: Did any particular kind of fund stand out for doing well? For doing poorly?
JeffBW: Technology funds were tops--up an average of 13.1%. Gold funds were the worst--down 9.2%
JackBW: This question reminds us we're competing with a certain game.
Question: Jeff, a question of the season: Which funds in 1994 would you say were the equivalent of the San Francisco 49ers, and which the equivalent of the Chargers?
JeffBW: Technology and health-care funds--the 49ers. Utilities and gold, the Chargers
JackBW: DSCollin is a first-timer in funds and wants your advice.
Question: I'm considering investing in a mutual fund for the first time. I'm looking for a growth fund. Which one has the best outlook for long-term growth?
JeffBW: Get our top performers' list. Start with the growth funds. Look at the small-company funds, too.
JackBW: RobertA86 has the kids' education to worry about.
Question: I'm a novice in mutual-fund investing, with two kids to put through college starting in about 10 years. What types of funds would you suggest I invest in starting now?
JeffBW: Growth funds, small-company funds, and don't forget to put in some foreign funds as well.
JackBW: AlisonMee wonders about the connection between Wall Street and south of the border.
Question: What's the likely impact of the Mexican financial crisis on mutual funds?
JeffBW: We've already seen a lot. The Latin America funds were creamed. Interestingly enough, many of those funds attracted new investments. People figured they were a good buy. Long-term, Latin America is attractive, but I don't think the current crisis is over.
JackBW: Jeff, could you explain how BW rates the funds--and who helps?
JeffBW: We take all the funds with a five-year track record. We total each fund's performance--after subtracting the load if there is one--and get a five-year return. Then we do a risk adjustment. The adjustment is based on how often the fund had months of negative returns. Morningstar does all the calculations for us.
JackBW: This week's issue has equity funds. What about bond and closed-end funds?
JeffBW: Next week we'll have bond funds; the week after, closed-end funds. We use the same risk ratings system for all three Scoreboards.
JackBW: By the way, if you want more from Morningstar, it has its own area on AOL.
JackBW: Fred55041 is also looking outside the U.S.
Question: Any suggestions for developing country bottom-fishing after the fall of the Mexican peso?
JeffBW: You might try tiptoeing into the emerging-markets funds by dollar-cost averaging. Don't put your money in all at once. Also, stick to diversified emerging-markets funds. Don't go for regionals like Latin or Pacific basin funds.
JackBW: LWHersey asks for advice on strategy for picking a fund.
Question: When choosing to invest in mutual funds for diversity, would you suggest picking by a good management company or an individual fund within a management company?
JeffBW: A good management company is better. An individual portfolio manager can pick up and leave. But if the fund company has a deep bench, then there should be some new talent to fill the slot.
JackBW: RPitts475 has the next question, Jeff.
Question: What do you think about telecommunications mutual funds?
JeffBW: I'm a little wary of very specialized funds. Sometimes they're great, sometimes awful. Pick some good diversified funds that include telecommunications in their mix, and let the portfolio manager worry about when to increase or decrease the telecom position. That's what you're paying him or her for.
JackBW: How about the earthquake in Japan, Walmarc wonders.
Question: What about Japanese markets after Kobe?
JeffBW: There was initially little reaction, and then an aftershock this past week, down about 5% or 6%. In our Japan story this week, we make the case for continued economic recovery.
JackBW: Jeff, a question about one of the titans.
Question: Fidelity Magellan Fund: How did it perform last year, and is it still a good investment?
JeffBW: Magellan had a -1.8% return in '94, which was exactly average. Frankly, the fund is so large--$36 billion--I don't see how it can really excel anymore. Fidelity has many, many other excellent funds to choose from.
JackBW: A worrywart is up next.
Question: Some worry that investors will become disenchanted with mutual funds, pull their money out, and cause a run on the stock market. Do you share this worry?
JeffBW: No, I don't. Much of the money is in IRAs, 401(k)s, and other retirement plans. That money is pretty stable. And equity-fund investors, I believe, understand the markets can be volatile. So you hang in and hang on. For the last 15 or so years, it's paid to "buy the dips." So far, I don't see anything out there that would warrant a wholesale flight from equity funds.
JackBW: A question from DSCollin about a specific fund group.
Question: What do you think of Twentieth Century Ultra funds?
JeffBW: Ultra made its reputation as an investor in smaller, fast-growing companies. Now it's a $9.6 billion fund. Look for something smaller. There's no shortage of funds like Ultra.
JackBW: Jeff, a seeming paradox for you.
Question: One of my funds was down 3% last year, but I got a 1099 saying I earned money and will have to pay taxes on it. How did this happen?
JeffBW: Good question. Even if the fund's net asset value is going down, the fund is earning money. The fund must pass along any dividends and interest income it earns. So that's paid to you and is taxable to you. If the fund sells stocks at a profit, and there are more sold at profit than at losses, those gains must be distributed to shareholders, too. That's another source of taxable income.
JackBW: Bartcamp asks the next question, Jeff.
Question: Many foreign funds have been highly rated and are said to be lower-risk. Is the time to get in these already passed?
JeffBW: There aren't many in our Scoreboard that are low-risk, or even highly rated. Over the last five years, these funds only had one or two really good years. But I believe diversified foreign funds have a place in every equity- fund portfolio. Why should you only invest in the U.S.? It's a big world out there with lots of opportunities.
JackBW: JoeSimcoe has a theory for you to test.
Question: What do you think about the theory to buy the hottest fund from the previous year--that it might not be the hottest this year, but that it ought to do pretty well?
JeffBW: Yes, some people are proponents of that. Actually, some academics have done studies that show fund managers sometimes have "hot hands" that can continue for several years. You want to be sure the hands are still pretty warm--and you should be watching carefully for a cooling trend.
JackBW: DGoldb411 writes in all caps, but it's a good question.
JackBW: He wants to know about no-load funds and mentions Franklin, Templeton, and Putnam--and also asks about variable annuities: Are they a good idea?
JeffBW: Neither Franklin, Templeton, nor Putnam is a no-load fund family. You pay a front-end load or a "contingent deferred sales charge." Variable annuities are like mutual funds except they're tax deferred. They can be useful tax-savings devices but ONLY if you have already exploited the cheaper ways of saving for retirement. You should first go the maximum in your IRA, 401(k), Keogh, etc. Only then consider a variable annuity. The knock on annuities is that the fees can be much higher than those for mutual funds. So you better be sure you need the features of the annuity. Probably most people would be better served by a mutual fund.
JackBW: FMarieS wants help in her fund research.
Question: If you go with the assumption that one of the main reasons to buy mutual funds is to "hire" a good equity manager, can you point to good sources of information on fund-manager backgrounds?
JeffBW: Our Scoreboard has a little head-and-shoulder icon that shows a fund manager who's been on the job for 10 or more years. If the record is good, then you have a pretty good start. Not all long-run managers are good. There's plenty of mediocrity out there among 885 funds
JackBW: Rabell52 has a question about Fidelity Value.
Question: Can you tell me anything about what happened to one of my favorite funds, Fidelity Value, which took a big decline in December and hasn't recovered yet?
JeffBW: Are you sure it took a hit? Many funds make distributions in December, and that will knock down the price of the fund. But if you reinvest the distributions, you then own more shares of the fund.
JackBW: Walmarc asks if gold is finally glittering.
Question: Is it time to buy mutual funds that are in gold?
JeffBW: The conventional wisdom is that everyone should have perhaps 5% to 10% of their assets in gold. It makes some sense, since gold funds seem to have a really good run once every four or five years. But 1993 was a terrific year for gold, so it might be a few more years before that happens again.
JackBW: Here's a question with really long-term implications, Jeff, from TomSer11.
Question: What do you think the best mutual fund would be for a 13-year- old with $6,000 to invest?
JeffBW: I'm going to duck the specific, but refer you to the top-rated BW funds. Any one of the growth, small-company, or international funds might be a good place to start.
JackBW: DGoldb411 wants to clarify an earlier question.
Question: The question I had is why does everyone talk about no-loads when there are some excellent funds with Franklin/Templeton and Putnam and so on, even by paying the up-front charges.
JeffBW: No-load funds are do-it-yourselfers, so I suppose people who make their own investment decisions talk about them more than people who leave it to a broker. Paying a load for a fund does not get you a better fund, it only gets you a broker to sell you the fund. True, Templeton has some excellent funds, but there are many excellent no-loads with similar track records. Why pay 4.5% off the top if you don't have to?
JackBW: We're running out of time, Jeff. When will the new edition of the BW Guide to Mutual Funds be available?
JeffBW: It should be out before taxes are due.
JackBW: Thanks to you, Jeff, and to the AOL audience. Remember that transcripts of this and all BW Online conferences will be available for downloading soon after the event.
OnlineHost: Thanks to Jeff Laderman and Business Week for this informative conference on mutual funds. If you'd like to keep talking, we invite you to move over to the BW Chat Room. Or you can post your comments or questions in the BW Online Message Boards (try the Economics & Finance board).
You'll find a collection of all BW stories about mutual funds since the beginning of 1994 in the Mutual Fund Corner, under What's New on the BW Online opening screen. While you're at it, explore all the features of BW Online (keyword: BW). And mark your calendars for a conference with BW editors or newsmakers every Sunday at 9pm ET.
Thanks again and good night!
Copyright 1995 McGraw-Hill, Inc. All rights reserved.
