Look for alternatives to employer's stock

Funds that skirt four major sectors

Dollars & Sense

February 03, 2002|By Russel Kinnel | Russel Kinnel,MORNINGSTAR.COM

Now that Enron has shown how risky it is to have a big piece of your portfolio in your employer's stock, it's time to do something about it.

A good first step is selling some of that stock and putting the proceeds into a mutual fund that doesn't own your company's shares or those of any close competitors. To help with that process, I screened for good funds that have very little exposure in four sectors - financial, technology, telecommunications and health care - using the Morningstar.com Premium Fund Selector.

For each industry, I've listed some quality funds that have low exposure to each stock sector.

The financial sector is so big you have to look hard to find a decent fund that has avoided it. I found a couple that are worth a look. First, there's Vanguard Primecap, which has a $25,000 minimum and one of the great records in the fund world. It has usually held less than 5 percent in financials, yet it isn't just concentrated into one or two industries.

Management takes a contrarian growth approach that has worked remarkably well over time. If you don't have the $25,000 for Vanguard Primecap, have a look at Fidelity Growth Co., which has just 5 percent in financials.

Just about every decent fund has dipped a toe in tech at one time or another, but the managers at Clipper Fund are just too cheap to do it. They'll buy only stocks that trade for at least a 30 percent discount to their intrinsic value and they'll hold cash or bonds if there aren't enough stocks that qualify.

This fund earned great returns during the tech meltdown of 2000-2001, so it should be a nice counterweight for people working for a leading-edge technology company. The fund currently has 3 percent of assets in tech, and that's about their peak. And their tech stocks aren't exactly Cisco Systems. They've got Pitney Bowes and Computer Sciences.

Most telecommunications stocks are classified as service sector stocks in our current scheme, so here you need to screen for funds with low weightings in services. Another super-cheap value fund popped up this time: Scudder Dreman High Return Equity. The fund is run by value stalwart David Dreman and it's never had more than 4 percent of assets in the sector. A deep-value investor, Dreman likes to make big bets on stocks that others hate. He's got 12 percent of the fund in Philip Morris.

Clipper Fund is also light on health care for the same reasons I outlined on tech. In addition, TCW Galileo Value Opportunities has next to nothing in health care today, though it did have 16 percent in the sector back in 1998. Susan Schottenfeld and Nick Gallucio run a concentrated fund mixing value criteria like cash flow and strong balance sheets with growth criteria like projected earnings-growth rates.

The fund's sector weightings reflect that unusual combination, as three-quarters of the fund are in technology, industrial cyclicals, and services. One caveat: Their record over the past four years was so good, it's hard to imagine them repeating that.

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