Business Week's sixth annual Guide to the Best Mutual Funds is in the bookstores -- and you can also find a sample chapter to download here on Business Week Online (from our Search & Download screen, choose Chapter Downloads from BW Online). The Sept. 19 guest was the book's author, BW Senior Writer Jeffrey M. Laderman, mutual-fund maven and market watcher.
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OnlineHost: Welcome to Business Week Online! Our guest tonight is Jeffrey M. Laderman (JeffBW), author of BW's Guide to the Best Mutual Funds, now in its sixth annual edition. He's ready for your questions on how to spot the best funds for your investment goals -- the children's education, a new home, retirement. Jack Dierdorff (JackBW), consulting editor of BW Online, is the moderator. And now for your questions!
JackBW: Good evening to everyone on AOL. And welcome, Jeff Laderman.
JeffBW: Thanks, Jack.
JackBW: Congratulations on the publication of BW's Guide to the Best Mutual Funds. McGraw-Hill is the publisher, and it's in bookstores now. Here's the opening question.
Question: Jeff, how can your Mutual Fund Guide be used to select the best funds for specific investment goals?
JeffBW: Good start. First, you should decide what your goals are. There's a chapter to help with that. Then read up on the kinds of funds, and you can see which sorts will best suit those goals. So if you have a toddler and you want to start saving for college, you pick equity funds, of course. Generally, you'd want growth funds, small company funds, and probably some foreign funds. Once you know what sorts you want, you're already well along. Then you can use the Scoreboard portion to identify the best in those categories you want.
JackBW: Here's another about the book.
Question: How much of the material in the book has been published in Business Week magazine?
JeffBW: The Scoreboards were published in Business Week. And Chapter 8 talks about 1995's results, and it's an expansion of what we wrote in BW earlier this year.
JackBW: RAgnone799 on Long Island, N.Y., sends us the next question.
Question: Jeff, I am worried that we are near another top. I own a good amount of Janus Olympus and have set a goal of 15.40 to sell. Is there any more upside potential?
JeffBW: You're suggesting you or I can "time" the market. I know I can't. Why did you buy the fund? If it's for a long-term investment, why do you want to sell it? Even if you get out at a top, are you going to get back in at the right time? And if it's in a taxable account, you'll owe capital gains tax. If you owned the fund less than a year, that tax can as be high as your ordinary income tax rate.
JackBW: Banchi32 is next up in the question box.
Question: I want to start a gift trust fund for my newborn. What is this type of fund, and is it a sound investment?
JeffBW: Look for a fund that invests in smaller companies, so those investments will grow along with your toddler.
JackBW: From Chicago, Veritas69 asks this question.
Question: I'm a first-time investor -- just graduated from school, looking to invest about $1,000 in an aggressive growth fund. Any suggestions on where to look? Other ideas?
JeffBW: Aggressive growth funds invest mainly, but not exclusively, in small companies. There are also small-company funds that stick to just that. You might look in both categories, and we have a number of highly rated small-company and growth funds in the Scoreboard.
JackBW: Take this one next, Jeff Laderman, author of BW's Guide to the Best Mutual Funds.
Question: Jeff, with so many good no-load funds, is there any reason to look at load funds?
JeffBW: Good question. The simple answer is no. If you like no-load funds because you are managing your own portfolio, you don't need load funds. There are plenty of good no-loads to choose from. Remember, the load does not buy you better performance, but pays for a salesman or adviser to sell you the fund.
JackBW: BobAB in Teaneck, N.J., brings up a much-discussed fund name.
Question: Jeff, what's up with Fidelity Magellan? Is it coming back, or not?
JeffBW: I'd say it's in a restructuring mode. The new manager, Bob Stansky, is unwinding the big bond position that's dragged the fund down this year. I think he's got it down to 15% or so from nearly 20%. But 15% of a $51 billion fund is a lot of bonds. The fund's total return for the year thus far is 3.7%, and that's pretty lame.
JackBW: RBLAMPTON poses a follow-up on Magellan.
Question: What is your opinion of Fidelity Magellan? Is it too big to outperform the market?
JeffBW: I'd say yes, it is too big to outperform. But I thought it was too big to outperform about $30 billion ago, and it outperformed until it hit about $50 billion.
JackBW: BUG N BOCA asks Jeff the next one.
Question: Should I have any international funds in my portfolio? Which part of the world?
JeffBW: If you have a long-term investment horizon, you definitely want international funds. They invest in economies that are growing much faster than ours, and so stock prices should do much better over the long haul. But they are definitely volatile. I wouldn't try to target countries, but choose some all-purpose international funds, and if you are a risk-taker, add a diversified emerging markets fund as well. I'd stay away from any so specific as a Japan or India or Latin America fund.
JackBW: MDebrietry from Macon, Ga., wants us to stay in the international arena for a moment.
Question: I just signed on. Am interested in Asian no-load funds. Any suggestions?
JeffBW: Take a look at T. Rowe Price New Asia, Fidelity Pacific Basin, and Scudder Pacific Opportunities. Vanguard has a Pacific Index fund that's interesting as well.
JackBW: Another timing question, this one from CKTBEAR.
Question: How do you feel about investing in some of the high-growth funds right now, such as the PBHG funds, which have already seen a big runup in the market this year? I keep waiting for the market to correct again, but it keeps going up, and I hate to be left out of a major long-term growth sector.
JeffBW: You answered your own question. If you really believe in major long-term growth, why worry about short-term corrections? The problem with trying to get out is that you may not get back in. Stay in, hang on, and ride it out. In the book we talk about market-timing, and the so-called market-timers have a mediocre record. A few make good calls now and then, but no one does it consistently.
JackBW: Grm11 asks one of many questions from the audience about specific funds.
Question: What do you think of Mutual Discovery Shares, one of Mike Price's smaller-cap value funds?
JeffBW: Mike Price is about as good a manager as you can get. I would have no problem with anyone investing in a Price fund -- even my mother.
JackBW: Next, from Strebo.
Question: Bonds haven't participated in this bull market. Is a bond fund a wise investment at this point?
JeffBW: Good question. If bonds do well, stocks will probably do even better. So I'd probably stick to stocks unless you need the income from bonds. I might look at convertible bond funds, high-yield bond funds, and if you are in a high tax bracket, muni-bond funds might offer some attractive returns right now.
JackBW: This comes from screen name Neon370.
Question: Would you consider Seligman Communications & Information a good fund for someone interested in buying and holding for the long term?
JeffBW: Only if you already have a more diversified long-term growth fund. The Seligman fund was riding high for a while, and is now in a slump because tech is on the outs. I'd rather invest in a diversified fund which will go to tech when it's right to be in tech, and steer clear when it isn't. That Seligman fund is always going to be in technology.
JackBW: This next question gives you a chance to explain how closed-end funds work.
Question: I would like to diversify a bit into foreign funds but am confused. What is a closed-end and does it trade like a stock? Also, the fund I'm looking at is currently trading at a discount to its NAV. I'm confused. By the way, it is the Morgan Stanley Thai fund.
JackBW: Closed-end funds, of course, aren't necessarily just in foreign stocks. They're another type of fund.
JeffBW: No, but most of the closed-end equity funds on the market today invest abroad. With a regular mutual fund, you always buy and sell the fund at the net asset value of the securities it owns. Not so with a closed-end. The shares trade like stocks, and usually trade at a price different from the NAV. If it's below the NAV -- and it usually is -- it's at a discount. You can make money two ways. If the NAV goes up, investors will recognize that and start bidding up the price of the shares. If they get really enthusiastic, they may bid the prices closer to the NAV, and if they're wildly bullish, even bid them up to a premium, or say $11 a share for a fund with a NAV of $10. If it goes to a premium, sell.
JackBW: We've talked about investing for newborns -- now move a bit up the age scale.
Question: I have about 10 years to accumulate enough investment income for a college education (for Junior). Suggestions on the best type of funds?
JeffBW: I'd start out with the same kind of funds you need for a toddler, but in about five years, you will have to start getting a little more conservative because you're getting closer to the time you'll need the money.
JackBW: Saw Cat 1 is at bat now.
Question: Would you recommend using a service such as IDS for a first-time investor, or should I just pick some well performing funds and go with them?
JeffBW: That depends on how much time you want to put in, and if you have the confidence to do it yourself. It's not rocket science, and anyone with enough interest to think they can do it probably can do it. You do have to keep an eye on your funds, though. "Buy and hold" is not "buy and forget."
JackBW: Now, a question from DJ2of3 for Jeff Laderman, author of BW's Mutual Fund Guide.
Question: I have been advised to sell my T. Rowe Price New Horizon Fund. What is your recommendation?
JeffBW: Who advised you to sell it? And why? If it's a market-timing move, I wouldn't. If you need the money, that's different. And what are you going to do with the proceeds? Do you think you have a better investment? And if the fund is in a taxable account, you're going to have to share part of the profits with the IRS.
JackBW: You're a market watcher as well as a fund watcher, Jeff -- how about this question?
Question: Are we due for another crash soon? What's your opinion?
JeffBW: I'm not in the crash camp. First, the economy is pretty healthy. Secondly, people are worrying that inflation might accelerate, but it still hasn't. The budget deficit is coming down, technology is making workers more productive, and U.S. companies are achieving enormous profitability. Doesn't sound like crash material to me.
JackBW: MSilbert, who gives Mars as the home address, has an earthly concern.
Question: I'm interested in buying a mutual fund. I just sold off some pharmaceutical stocks and have about $3,000 I would like to invest. I would like a fund with moderate risk, preferably a no-load -- any thoughts?
JeffBW: I'd look at the Mutual Series funds -- probably Mutual Discovery or Mutual Qualified, since Mutual Beacon and Mutual Shares have a $5,000 minimum on initial investments. They will join the Franklin group in November, and after that they'll be load funds. If you invest in any of them before they go load, you will be grandfathered as a no-load investor and won't have to pay loads for subsequent investments.
JackBW: LaurenStPl used the Interact button to send us this question.
Question: It seems that many new funds do better than the larger established funds. Is this a function of their size? Are there dangers with going for a new fund such as Van Wagoner's Mid Cap?
JeffBW: Good question, Lauren. Yes, a startup fund can get a jackrabbit start and leave the older, more established funds in the dust. If a new fund gets lucky with a few good IPOs, they can really make the NAV soar. The same IPOs in a $500 million fund might have no discernible impact. New funds offered by experienced managers can be good deals. New funds from unknowns are risky. Van Wagoner has experience, and has done a heck of a job, though his funds have come well off their highs.
JackBW: SliceHook has a sector-fund question.
Question: I own Fidelity Select Electronics fund. Stay or leave?
JeffBW: Hard to say unless I know why you went in the first place. I suspect you were playing a bet on the tech sector. I think tech is a good long-term play, and we've already had a pretty sharp correction in a lot of the stocks. So if you've stuck with it this far, you probably should ride it out.
JackBW: Are you up to a financial planning question, Jeff? From Cobalt eyz in Washington, D.C.
Question: I have $23,000 in stock mutual funds and a $23,000 student loan (10 years repayment at 8% a year) that I must begin paying next month. I don't need the cash now. Should I repay the loan? Or should I keep the funds and try to earn more (after taxes) than I pay in interest?
JeffBW: Did you use this money to go to B-school?
JackBW: He's an attorney, Jeff.
JeffBW: If you don't mind carrying the debt, the financially savvy person would probably stay in the market and try to outearn the interest rate. But you may want to clean up the debt for other reasons -- like borrowing for a car or a house. So you have to take that into consideration. Maybe the best thing is to pay down some of the loan, but not all.
JackBW: We've talked about educating the kids. Now PACKERDB turns us to retirement planning.
Question: I need to find some good-quality value funds for retirement purposes. Any suggestions?
JeffBW: Depends on how far you are from retiring. Vanguard has an SP500 Value Index fund, which is a low-cost way to capture the "value" half of the S&P 500. The Mutual Series group is also a value group, and I'd take a look at some of the Babson and Neuberger & Berman funds. In our fund Scoreboard, we identify fund style. Look for funds with LV, MV, or SV, which stand for large cap value, medium cap value, and small cap value funds.
JackBW: Try this one next, Jeff.
Question: Is there a fund that invests only in the top 10 highest yielding Dow stocks?
JeffBW: I think some of the brokerage firms sell unit trusts that do that, but I'm not sure about mutual funds. If a fund did that, it might not meet diversification standards.
JackBW: Jeff, we're out of time. But I think I can safely say that the answers to many of tonight's questions are in your book. You can download a sample chapter of BW's Guide to the Best Mutual Funds in BW Online. Select BW Online's Business Books, under BW Plus!
JeffBW: Yes, download the chapter and read it -- sort of like test-driving a book. Not to sound too commercial, but I think you can buy the book right in BW Online.
JackBW: Correct! It gives you general guidance and specifics on more than 1,000 funds, including BW ratings.
Thanks, Jeff, for joining us tonight to talk about finding the best mutual funds. Thanks, too, to the audience for the numerous questions -- too numerous to use all of them, in fact.
Transcripts of this and all BW Online conferences are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight to all!
Copyright 1996 by The McGraw-Hill Companies, Inc. All rights reserved.
