Growth and income funds offer returns of equity investments without the risks

MUTUAL FUNDS

June 16, 1991|By WERNER RENBERG | WERNER RENBERG,1991, Werner Renberg

Whenever the stock market has had a tremendous rise, as it has in recent months, you hear a lot of talk about taking profits and selling overvalued stocks (if not about paying income taxes on those capital gains or brokers' commissions on the trades).

You also hear suggestions to keep the sales proceeds in money-market funds until a correction hammers down share prices so the same stocks or others can be bought at lower levels.

While this may work for those who claim the ability to call market turns successfully, it doesn't work for most investors, who don't have -- and shouldn't expect to have -- the knack and who find unsuccessful market timing costly. The correction may come later than expected, depriving them of additional gains. Or the recovery may come sooner than expected; prices surge while they're still trying to muster enough confidence to get back into the market.

If you're invested in well-managed equity mutual funds, you should not have to worry about getting out (and paying taxes on gains) until you realize your long-term investment goals.

You should be able to stay in the funds, letting the managers worry about which stocks have become overvalued, which reasonably priced shares should be bought to replace them, and whether they should allocate more or less of their assets to cash equivalents.

If you're seriously concerned about stock market risk but want to enjoy the returns equity investments can produce, one category of equity funds that should let you sleep at night during periods of market turbulence is growth and income funds.

They are very popular because, as the name implies, they offer both capital appreciation and income, and because they are less volatile. The income portions of their total returns not only accommodate those who want dividends in cash, but they also supply a cushion for those who reinvest distributions in more shares (at lower prices) when the market takes a tumble.

While growth funds exceed them in number, 368 vs. 281, growth and income funds constitute the largest fund category in terms of assets: $104 billion at the end of April (vs. $80 billion for growth funds) out of $292 billion for all equity funds reporting to the Investment Company Institute. According to Lipper Analytical Services, $60 billion alone is accounted for by 20 funds with net assets exceeding $1 billion, led by Vanguard's $7.8 billion Windsor Fund.

Although funds classified by ICI, Lipper and others as growth and income funds may give growth and income as their broad investment objectives, they differ in the emphasis they give to more specific goals. They also differ in how they're invested to achieve their goals and, as the table indicates, in how well they perform.

Some -- such as Massachusetts Investors Trust and the Fidelity, T. Rowe Price, and Scudder growth and income funds -- cite three goals: long-term capital growth, current income and growth of income.

Others, such as Investment Company of America, Selected American, and U.S. Boston Growth & Income, aim at long-term growth of capital and income -- to which funds such as Dodge & Cox Stock and Vanguard's Windsor II add current income as a secondary objective.

Still others simply shoot for high total return. FPA Paramount and Merrill Lynch Capital, for example, are in this group.

To achieve these objectives, nearly all are primarily invested in dividend-paying common stocks -- in some cases, over 90 percent of the fund's assets are in such stocks -- and in varying proportions of money-market instruments. Some also invest in bonds to enhance income or moderate volatility.

In selecting stocks, some managers look for those whose price-earnings ratios or book value are lower than those of the Standard & Poor's 500 or whose yields are higher than those of the index (currently just above 3 percent). Others put more stress on prospects for growth in earnings, dividends or both.

One fund, Sovereign Investors, takes an unusual approach: It invests only in stocks of companies that have raised their dividends annually for 10 or more years. Even though an increased number of companies have recently cut, or even skipped, dividends, President George A. Bailey Jr. says he still has more than 400 to choose from.

If growth and income funds sound right for you, here are some pointers to keep in mind when comparing prospective funds:

* Dividends can be powerful in building capital. Of the Vanguard 500 Portfolio's 10-year average return of 14.9 percent, about 6.9 percent is attributable to dividend income and its reinvestment.

* Unless you're investing in an IRA, income taxes on capital gains distributions can reduce your after-tax profits significantly. Look for funds with lower rates of portfolio turnover.

* Decide whether current income or growth of income matters more to you, and only consider funds whose objectives match yours.

In the final analysis, it's total return that matters most. Focus on funds that consistently have been among the leading performers. If their total returns continue to run ahead of the average but their dividends fall a bit short of your needs, you can always redeem some shares to make up the difference.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.