Funds to Consider For the Long Term
By James K. Glassman
Sunday, January 10, 1999; Page H01
As a guy who ridicules the proliferation of "10 Best" lists, I risk being
called a hypocrite for proffering my own every January. But there's a
difference. This is a list not of the best mutual funds for the year ahead, but
of some very good funds that should shine over the long term, meaning
five years at least.
The first time I tried this exercise, at the start of 1997, the 10 funds
returned 21.1 percent, beating the Dow Jones industrial average by four
points but trailing the Standard & Poor's 500-stock index, a broader
measure of the market, by six.
Last year, I recited the previous 10 and added five new ones. Overall, the
funds were up an average of 14.8 percent. That's about the same as the
average stock fund, at 14.5 percent, but far below the S&P, at 28.7
percent.
It's not hard to identify the main problem: My funds, especially the new
ones, were heavily invested in value stocks -- shares whose low
price-to-earnings ratios and high dividends indicated they were bargains,
shunned by the market but perhaps ready to bloom. As it turned out,
value stocks had one of their worst years in history, compared with their
opposite, growth stocks. For example, Vanguard's value-stock index fund
returned just 14.6 percent in 1998 while its growth-stock counterpart
returned 42.2 percent.
There's a lesson here: Diversification counts. Putting nearly all your eggs in
the bargain basket can be risky. Value stocks will certainly come back,
but it makes sense to balance your holdings.
With that, here are some funds to consider seriously, not just for 1999 but
for the long haul. They are meant as core holdings, comprising mainly
large-cap stocks. A typical personal portfolio should contain two or three
core funds, plus at least one small-cap and one international fund.
How to pick a fund? Long-term performance is important, but so is risk --
the severity of the fund's ups and downs over the years. I generally look
for funds that have retained their managers for a long time, carry little cash
and have low turnover. Also important: small expense ratios. My
approach is similar to the one described in a fine new book, "But Which
Mutual Funds?" by Steven T. Goldberg of Kiplinger's Personal Finance
magazine.
Most of the names below will sound familiar. I have mentioned them in the
past. After all, a good fund isn't a flash in the pan.
The funds are listed with the phone number to call for a prospectus, plus
average annual returns, according to Lipper Inc. -- in most cases for the
three years ending Dec. 31, 1998. By way of comparison, the S&P
returned 28.3 percent; the average stock fund, 14.5 percent.
Legg Mason Value Trust (1-800-822-5544; three-year return, 41.1
percent). This fund is listed first for a reason: Its performance puts it in a
class of its own, and that's no hype. Manager Bill Miller in 1998 beat the
S&P for the eighth year in a row -- massacred it, with a return of 48
percent. Despite its name, this isn't really a value fund in the traditional
sense. Miller's top two holdings, at last report, were Dell Computer Corp.
(DELL) and America Online Inc. (AOL), and the fund is 20 percent
riskier than the market as a whole. But, as Value Line puts it, he "searches
for securities selling at a significant discount to the economic value of their
underlying businesses," including Citigroup Inc. (C) and Fannie Mae
(FNM), part of a financial sector he expects to recover in 1999. Miller
holds shares for a long time; turnover averages just 15 percent annually,
meaning that he keeps the typical stock more than six years. Only
drawback: Expenses are in the 1.8 percent range, compared with an
average of 1.3 percent. But that's a small price to pay to have Bill Miller
doing your stock picking.
Vanguard Total Stock Market Index (1-800-662-7447; three-year
return, 25.0 percent). An index fund simply buys all the stocks in one of
the baskets that make up the popular averages. It's managed by a
computer rather than a person. While Vanguard's fund that tracks the
S&P 500 is now the largest in America, this one, which mimics the
Wilshire 5000, an index that includes virtually all stocks, could be a better
choice -- if small and mid-cap stocks finally end their four-year swoon
and catch up with large-caps. Expenses are tiny (about 0.2 percent) and
turnover is practically nonexistent, so you won't run up big annual tax bills.
Guinness Flight Wired Index Fund (1-800-915-6565). This is a
brand-new fund, launched Dec. 15, so there's no track record, but I am a
huge fan. Since it's an index fund, you know what you're getting -- no
need to worry about quirky managers. The fund holds a portfolio
composed of the 40 stocks in the Wired index, companies chosen by the
hip high-tech monthly to serve as a bellwether for the new economy. The
emphasis is on technology, and the fund provides an excellent way to
expose yourself to such Internet stocks as Amazon.com Inc. (AMZN),
the online retailer, and Yahoo Inc. (YHOO), the search-engine portal, in a
diversified bundle that includes more traditional, but still innovative, firms
such as AMR Corp. (AMR), parent of American Airlines Inc. and
principal owner of the Sabre computerized reservations system; Nucor
Corp. (NUE), the mini-mill steel producer; Wal-Mart Stores Inc.
(WMT); Walt Disney Co. (DIS); and Schlumberger Ltd. (SLB), oil
services.
Dreyfus Disciplined Stock (1-800-645-6561; three-year return, 27.8
percent). This is a solid, well-run, highly diversified fund that's a classic
core holding. It keeps up with the S&P and whips its peers, with expenses
under 1 percent and moderate turnover. Manager Bert Mullins uses
computer screening to find stocks that have a combination of low
valuations and momentum, then applies human analysis of the companies'
fundamentals. At last report, top holdings included Microsoft Corp.
(MSFT), Coca-Cola Co. (KO) and General Electric Co. (GE) -- hardly
a shocking list, but it's a system that does the job very well.
Transamerica Premier Aggressive Growth (1-800-892-7587; one-year
return, 84.1 percent). A nice complement to Dreyfus above and
TIAA/CREF below is this go-go fund about which I rhapsodized last
week. Manager Phil Trieck has placed a heavy bet on Amazon but also
owns a wonderful mix of stocks, from Warren Buffett's Berkshire
Hathaway Inc. (BRK) to small-cap health care firms such as Alternative
Living Services Inc. (ALI). This is a concentrated fund, with five holdings
representing three-eighths of the assets. While it was launched less than
two years ago, I include the fund because Trieck has been running money
extremely successfully for Transamerica Corp., the giant insurance
company, for a long time.
TIAA/CREF Growth & Income (1-800-223-1200; one-year return, 30.5
percent). The world's largest private pension system, which provides for
the retirement of 2 million employees of universities and similar nonprofits,
opened its funds to the public a little over a year ago, and so far the results
have been superb. According to a long-standing TIAA/CREF strategy,
Carlton Martin, the manager of Growth & Income, invests part of the fund
(at least 20 percent) in the S&P index and uses the rest to try to beat it --
which he did in 1998 by nearly two points, an impressive achievement.
Bob Brinker, a sensible analyst who edits the Marketimer newsletter in
Irvington, N.Y., recently recommended the fund, noting "low expenses
and a high level of tax efficiency." The fund emphasizes large-caps that
provide moderate dividends, and the portfolio is a blend of value and
growth, with money spread across all industries.
T. Rowe Price Dividend Growth (1-800-638-5660; three-year return,
23.5 percent). This fund, managed by William Stromberg, invests in
large-cap stocks that pay rising dividends -- a strategy that results in a
portfolio with an overall risk level that's one-third below average. The fund
is highly diversified, with both value and growth and no stock representing
more than 2 percent of total assets; turnover is just 40 percent. Last year,
the fund's performance was sub-par, with a return of 15.0 percent, but
don't let that bother you -- especially if you appreciate the income and
stability that dividends provide. It should bounce back. Top holdings
include Mobil Corp. (MOB) and Allied Signal Inc. (ALD).
Janus Twenty (1-800-525-3713; three-year return, 42.2 percent). Scott
Schoelzel is another manager who shows that concentrating a portfolio
pays off big -- or, as Mae West, as quoted by Warren Buffett, put it,
"Too much of a good thing can be wonderful." Schoelzel notched a 74
percent return in 1998 -- best of the 100 largest funds -- with such stocks
as Dell, Microsoft and drug companies Pfizer Inc. (PFE) and Warner
Lambert Co. (WLA). His top seven holdings represent half his assets.
Expect volatility from the fund, but also brilliant stock picking and
moderate expenses.
Fidelity Fund (1-800-544-8888; three-year return, 27.5 percent). It was
a comeback year for Fidelity. In 1998, Magellan returned 33.6 percent
and Contrafund, my own core holding, returned 31.5 percent;
unfortunately, both are closed to new investors. But the old flagship,
Fidelity Fund, awaits with open arms. It returned 31.0 percent last year,
on top of 32.1 percent in 1997. Beth Terrana, the manager, buys
name-brand large-caps, but she looks for turnaround situations,
companies that can increase their profits by cutting costs and using their
capital better rather than by boosting unit sales. Holdings include banks,
drug stocks, Philip Morris Cos. Inc. (MO) and Wal-Mart.
Torray Fund (301-493-4600; three-year return, 24.2 percent). Bob
Torray, the ultimate value player, had a rough year in 1998, scoring a
return of just 8.2 percent. But no matter. He's in for the long haul, and he
beat the S&P in five of the preceding six years. Lately, Torray likes
satellite stocks and financials, though he's poking around amid the ruins of
the oil and gas sector. His top holdings include SLM Holding Corp.
(SLM), the student-loan specialist, and Hughes Electronics Corp.
(GMH). Torray's expenses are about average -- a good deal considering
his genius at choosing stocks -- but there's a $10,000 minimum
investment.
Enterprise Growth Portfolio (1-800-432-4320; three-year return, 31.8
percent). The only fund among last year's five that's making a repeat
appearance, Enterprise has finished in the top quintile (leading 20 percent
of funds) for the fourth year in a row. Manager Ron Canakaris looks for
fast-growing companies whose stock (he hopes) is temporarily depressed.
He also likes firms that can benefit from expansion in the global
marketplace, such as Coke, Procter & Gamble Co. (PG) and Johnson &
Johnson (JNJ). He keeps a trim portfolio of about 40 stocks, with minimal
turnover and only average risk.
Any one of the these funds (or, better, two or three of them with different
styles) gives you a good foundation for a long-term portfolio. So get
started.
Glassman's e-mail address is jkglassman@aol.com.
© Copyright 1999 The Washington Post Company
Back to the top
|
