Time to assess investment mix in mutual funds

January 18, 1998|By Ellen Uzelac | Ellen Uzelac,SPECIAL TO THE SUN

Oh, how we love our mutual funds: Throw money at them and it multiplies. If you had put $10,000 into a U.S. equity fund three years ago, odds are you would have $20,000 today. That's the good news.

The bad news? This year, we might start loving our mutual funds a little less. "Investors have become pretty spoiled," notes Susan Dziubinski, editor of Morningstar Investor. "Expecting a 25 percent return each year is unrealistic. We're anticipating returns in the 10 to 12 percent range."

The mutual fund, in its infancy 30 years ago, has matured into a $4.3 trillion industry. No longer relegated to the financial pages, it is the stuff of cocktail chatter, bedtime talk -- and it has made a lot of people a lot of money.

Consider this heart-quickening statistic: The Munder Microcap Equity B -- the top performing mutual fund as of Dec. 12 -- had a return of 64.4 percent in 1997.

But the recent volatility of the U.S. stock market and the economic troubles in Asia have caused money managers and industry analysts to rethink the mutual fund, the Old Faithful in so many investor portfolios.

Choosing on performance

"Something I found really disturbing in the October downturn was that there weren't many safe places to hide," says Benjamin Poor, a mutual funds analyst with Kanon Bloch Carre, a Boston financial consulting group.

"Investors sometimes choose their funds based purely on performance. What they need to look at is how well they do in down markets. It's a good time to look at your risk tolerance. If that period in October spooked you, you need to look at your allocation."

Poor suggests spreading assets among three to four funds, and make sure the funds are truly diversified -- a mix of mid, small and large cap stocks and a blend of growth and value holdings. (He likes the Torray Fund and the Caldwell & Orkin Market Opportunity Fund because they typically do very well in market downturns.)

"Also, it might be a good time to slightly increase your cash position. Frankly, I worry that people are putting too much of their money into the market," Poor says. "Set up an emergency fund through money markets or CDs, something easily liquidated."

Last year, investors favored financial services, real estate and small-value funds, according to Morningstar, the Chicago fund research firm. And the more funds the better: Fund companies, between January and October of last year, were launching an average of 14 diversified stock funds a month.

Morningstar expects that real estate funds, considered something of an inflation hedge, will continue to be popular. John Nuveen & Co., the Chicago-based mutual funds firm and investment manager, looks for funds in the international and small-cap sectors to be money makers in 1998, according to John Rekenthaler, vice president of investment strategies.

If the financial climate continues domestically and abroad, Rekenthaler also suggests that growth funds will outperform value-styled portfolios.

For the younger, risk-tolerant investor, Rekenthaler recommends an all-stock portfolio. "I would be sure to have a good dollop of international stocks and I'm not averse to a small corner dipping into Southeast Asia," he says.

"Obviously, it's a lot riskier, but there's a very good chance in Southeast Asia of making a lot of money over the next five years. You're not going to be making that kind of money in big U.S. stocks."

Conservative formula

But for investors who are only a few years away from tapping into their funds, Rekenthaler calls for a more conservative approach. "Sixty percent in stocks, 40 in bonds, nothing wrong with that," he says. "Just make sure you have a balanced portfolio. There's clearly a possibility the market could get nailed a couple of years in a row and that we could give back a third, or half, of these gains."

At DALBAR, a Boston financial consulting firm, President Louis Harvey says the maturing of the mutual fund industry has resulted in a lot of solid performers, but that they don't differ significantly from one another.

"That's a healthy thing but it means you're typically not going to have one fund streaking way ahead of the pack," says Harvey. "What that means is that appropriately selecting a fund is going to be less difficult because it's going to be tougher to make a mistake. It's far more complex to figure out what you own: the number of products, the mix of them.

"Should you be buying a China fund with a little bit of Russian exposure and two feet in India? It gets complicated. With funds as with anything else, you've got to pay attention."

Pub Date: 1/18/98

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