To discuss Business Week's annual Mutual Fund Scoreboard, rating 885 equity funds, the guests on Jan. 29 were BW Senior Writer (and mutual fund maven) Jeffrey M. Laderman and Amy Arnott of Morningstar Inc.
OnlineHost: Copyright 1996 America Online, Inc.
OnlineHost: Material entered into AOL by persons other than those identified as Business Week's employees or authorized representatives, acting on behalf of Business Week, is material for which Business Week assumes no responsibility.
OnlineHost: Welcome to Business Week Online! Tonight we hope to help you pick the best mutual funds for your investment goals. BW's annual Mutual Fund Scoreboard is out (Feb. 5 issue), and our guests are Jeffrey M. Laderman (JeffBW), BW senior writer and mutual fund maven, and Amy Arnott, editor of Morningstar Mutual Funds, which supplied the data for BW's performance ratings of 885 equity funds.
JackBW: Good evening and welcome to everyone from AOL. And a special welcome to Amy Arnott of Morningstar.
AmyArnott: Hi, Jack. Hi, Jeff. It's great to be here online tonight -- though it's cold in Chicago.
JackBW: Not exactly tropical in New York, Amy.
JackBW: Hi, Jeff Laderman.
JeffBW: Hi, Amy. Hi, Jack.
JackBW: Here's an opening question you might tackle first, Jeff.
Question: It was a spectacular year for the stock market. Did mutual funds share in the runup that took the Dow above 5000?
JeffBW: Yes, if you mean they went up. No, if you mean they did as well. The average U.S. equity fund trailed the S&P 500 -- for a number of reasons I'll mention if you want me to.
JackBW: Go ahead, Jeff.
JeffBW: First, most of the funds had a lot of cash at the beginning of the year. The managers did not believe there would be a big move up. So when the market started moving, the managers were caught unprepared. And many of them never caught up. Another reason was that a lot of the gains were made in a few sectors like technology and finance and health care. If a fund didn't have good representations in those sectors, they lagged.
AmyArnott: I think a lot of managers also got whipsawed by technology. They tried to build up their tech exposure during the year and then got hurt during the fourth quarter.
JackBW: Karenx3 goes right to the heart of the BW performance ratings.
Question: Are there any particular fund families you can name that tend to have superior performance?
AmyArnott: Fidelity has been very strong in the past, although the performance in 1995 did lag behind the market a bit. T. Rowe Price has also been quite solid.
JackBW: Caterina30 asks for help with a very generous birthday gift.
Question: Hello from San Juan, Puerto Rico. I have an 11-month-old baby. For her birthday, I would like to invest $10,000 in a mutual fund. Which one would you recommend? It is for her future, a long-term investment.
JeffBW: Tough question. What kind of risk-taker are you, Caterina? You might look at our Experts story [accompanying the Scoreboard in the Feb. 5 issue]. We have an investment adviser design a $10,000 portfolio for a youngster who will use that money one day to finance a college education. There are five funds: Oakmark, Strong Opportunity, PBHG Growth, Baron Asset, and Warburg Pincus International Equity Common.
AmyArnott: With a child, you might also want to consider Twentieth Century Giftrust. The only drawback is that the account would be in her name rather than yours.
JackBW: At the other end of the investment spectrum, age-wise, we have CALISTA778.
Question: I'm 72. How far out should I go -- less than five years?
JeffBW: Depends if you need income or growth. Investment advisers now recommend seniors keep as much money as they can in equities. Seniors are living longer, and fixed income just doesn't do the job anymore.
JackBW: Now, a question about a specific sector, from Wicker69.
Question: What do you think about the health/science sector's outlook for the next 5- and 10-year span? Do you think it's favorable due to the increase of baby boomers?
AmyArnott: I think the outlook for health care is pretty positive. The population is getting older, and demand for health care is increasing. There have also been promising developments in biotech. But this is a very risky area. I wouldn't put more than a small portion of your portfolio into a specialized health-care fund.
JackBW: Jkyang sent us this question a day ahead of time -- thanks, Jkyang.
Question: I recently read that twentysomethings should start investing now. I'm 23 and a grad student with a part-time job paying $10,000 a year. What about a 401(k) or an IRA in mutual funds, plus universal life insurance?
JeffBW: You're never too young to start investing. You can fund an IRA. But remember, you're locking it up for nearly 40 years at the earliest, or you will pay a penalty for taking it out. As for the universal life insurance, I'll have to take a pass -- life insurance is a little out of my expertise.
JackBW: TKMichalk has a basic question for a fund shopper, on loads.
Question: For a couple 43 years old needing growth from investments, which fund do you recommend most highly -- load or no-load?
AmyArnott: It depends on how much advice you need. Some people like to do research on funds for their own portfolios. But others would rather have a pro work with them on putting together a plan. If you can find a good broker or financial planner, it can be worth being in a load. But if you have a shorter time horizon, the sales charges will cut into your returns.
JackBW: And speaking of growth, Jerseee has a fund in mind.
Question: Amy, what can you tell me about PBHG Emerging Growth Fund?
AmyArnott: PBHG Emerging Growth is a pretty exciting fund [not open to new investors at the moment]. It has about 40% of its assets in tech stocks, and another 23% in health care. So far, its performance has been great, but it will probably be very volatile. One of the co-managers is Gary Pilgrim, who has a very good record with PBHG Growth [which recently reopened to new investors].
JackBW: MarjorieU in New York asks the next one.
Question: How should a person in early retirement invest? Prior to this, I invested heavily in stock and muni bond funds. I want growth and income. Do I sell the muni bond funds? I also have muni bonds and T-notes and individual stocks -- I am 52.
JeffBW: If you're 52, you have to invest for growth. Hopefully, you have many, many years ahead of you. Bonds are not going to do it. Muni bonds make sense, perhaps, if you're in a high enough tax bracket. But if you don't need to generate current income, you should probably choose a moderate growth portfolio. We have one in the magazine, designed for a person who is 50. We also have one that's for a new retiree. You can get some good ideas from both.
JackBW: If we can go back to Karenx3, she raises a follow-up point for us.
Question: Amy, Twentieth Century Giftrust creates potential estate/gift tax problems. It is considered a "gift of future interest" by the IRS. If you want to give advice, you need to present this serious caveat.
AmyArnott: I'm not an expert in tax law. But the fund's prospectus does note that taxes are paid out of the trust rather than by the original investor because the trusts are separate taxable entities.
JeffBW: Depends on how much you are gifting. If you are gifting less than $10,000 in one year, there shouldn't be a problem. But I'm not a trust and estates lawyer, either.
JackBW: Jeff, JDizog102 has a question about the market in general, important for funds, too.
Question: When will the 10% to 15% market correction occur?
AmyArnott: I wish I knew!
JeffBW: If I knew that, would I be doing this?
JackBW: Well, Jeff, your story talks a little about '96 prospects for funds compared to '95.
JeffBW: Seriously, if you are a long-term investor, it doesn't matter. Well, after a 31% gain, you can't expect to have a great year. The long-term return for stocks is only about 10.5%, and I would expect 1996's gain to be much closer to that. I don't think we'll have a bear market, but I think it will be a little more difficult for stocks in 1996. Remember, interest rates fell two percentage points in 1995, and that was a powerful force behind stocks.
I don't think they can fall that much this year -- perhaps another half-percent or so, but not much on the long end. Short-term rates do have some room to fall, but I think the market is already factoring that in. There could be trouble if they don't come down. That, of course, is up to Mr. Greenspan and the Fed.
JackBW: TannerTec in Denver is next with another basic question.
Question: How long should you stay with a mutual fund? Five years at least?
AmyArnott: It depends on your financial goals. We always recommend staying in a fund as long as possible. If you stick with it for the long term, you can benefit from compounding your gains over time. However, if there's a change in management, or performance has been lagging for two or three years, you might want to consider getting out.
JackBW: Ona Pedlr in Ona, W. Va., has an allocation question.
Question: What percentage in an aggressive portofolio would you allocate to international and emerging-market-style funds for this year?
JeffBW: In our advisers story, the international components are anywhere from 25% to 40%. For an aggressive investor, I would go higher because the international markets, especially the emerging markets, have underperformed for a long time and have a reasonable opportunity to catch up.
JackBW: BethF56 in North Olmsted, Ohio, seems to be following up on some earlier advice here.
Question: My husband, age 60, recently retired with a small pension. Now I'm moving money from our equity funds to an income fund to supplement our income. Bad idea?
JeffBW: If you need the money, no. But I would minimize that. You need to generate capital so that in 20 years, you have enough money to generate income then.
JackBW: BobbyRun in Louisville asks the next question.
Question: Amy, how do you feel bond funds will do vs. stock funds in 1996?
AmyArnott: It's hard to say. I think their performance will probably be a lot closer than it was in 1995. There has been some concern in the bond market about the budget situation. But if economic growth tapers off, there should be a fairly stable environment for bond funds.
JeffBW: We're going to tackle bond funds in next week's Business Week, both in the magazine and online. The week after that, we do closed-end funds, both stocks and bonds. And in the spring, watch out for the sixth edition of BW's Guide to Mutual Funds, published by McGraw-Hill.
JackBW: Thanks, Jeff. And now here's another question about a fund type.
Question: Amy, how do you feel about index funds like the Vanguard Index Trust?
AmyArnott: I think index funds make a lot of sense, especially for large-cap domestic stocks. Index funds are a great choice for investors who don't want to worry that a fund manager will goof up, or if you don't have a lot of time to spend researching hundreds of different funds. I'm not a big fan of index funds in other areas like small-cap and foreign markets because I think there's more opportunity for an active manager to add value there.
JeffBW: Perhaps it was an anomaly, but Vanguard's Emerging Markets Index Fund was the best-performing emerging markets fund of 1995.
JackBW: Speaking of small-caps, here's TJKELLEY.
Question: Could someone please comment on the Alger Small-Cap Fund?
AmyArnott: Alger Small Capitalization Portfolio is the name. It has had a tough time lately. It was down about 6% in the fourth quarter of '95. But it's typically quite good when the market rallies. One drawback is that the expenses on the fund are very high -- the expense ratio is over 2% a year. I would only buy this fund if you're a very aggressive investor and willing to hold for the long term. It has a huge position in tech stocks and a very aggressive growth-oriented strategy.
JackBW: CChristofa wants to hear a score from the BW Scoreboard.
Question: I am waiting to find out what the best performing no-load fund was in 1995. Could you tell me?
JeffBW: We don't break out performance by load or no-load, but I think it was probably Wasatch MidCap.
AmyArnott: It was actually Turner Small Cap Equity. It's a tiny fund with only $15 million in assets, and it was up 68% for the year. It looks like it has a fair amount of IPO exposure, but it didn't get hurt much during the tech sell-off.
JeffBW: That's in Morningstar's database, but the BW Scoreboard doesn't have funds that small. Wish we had room for those really good little gems.
JackBW: Next, from Phylbird.
Question: In your opinion, what are the top five growth funds?
AmyArnott: Depends on what you mean by top five. If you're looking at risk-adjusted performance, I would say funds like Oakmark, Putnam New Opportunities, Fidelity Magellan, and Third Avenue Value. Sequoia Fund is also very strong, but is closed to new investors. Another possibility is Davis New York Venture.
JackBW: One final question for tonight.
Question: Does either of you agree with BW's online neighbors, the Motley Fools, who seem to say that mutual funds are too much work for too little return -- that stocks are the only place to be?
JackBW: That's a good place to end.
AmyArnott: No, I don't agree. I think that for most investors mutual funds are the easiest and most economical way to invest. Unless you have a lot of money to work with, it's hard to put together a diversified portfolio without spending a lot on commissions.
JackBW: Jeff, a quick comment?
JeffBW: Don't think I can improve on Amy's answer.
JackBW: That's it for tonight. Thanks, Amy Arnott of Morningstar.
AmyArnott: Thanks for having me. I really enjoyed it.
JackBW: And thanks, Jeff Laderman of Business Week.
JeffBW: Thanks, and goodnight.
JackBW: Special thanks to all of you who asked questions. And apologies to the many whose questions we didn't have time for. Transcripts of this and all BW Online conferences are available soon after the event. Look under Search & Downloads or Talk & Conferences on our opening screen. Thanks again and goodnight!
Copyright 1996 by The McGraw-Hill Companies, Inc. All rights reserved.
