Picking a good fund is like selecting a fine wine

Your Funds

Dollars & Sense

February 24, 2002|By CHARLES JAFFE

MOST big fund companies do one thing well, sometimes two.

It might be growth or value investing, it might be chasing momentum or picking bonds, but fund families tend to grow up around a central expertise. The further you move from that, the more potential you have to be unhappy with performance.

One quick take on a firm's primary investment strengths is Barron's annual ranking of fund-family performance. Each February, Barron's works with Lipper Inc. to determine the "best" fund families of the past year. Of course, the Barron's list tends to tell you what has been good, not what will work going forward.

Even the winning fund companies from among the 87 included in the survey actually lost money in 2001, with their average fund dropping 1 percent. The five bottom-dwellers on the list all had losses for their average domestic stock fund of between 17 percent and 28 percent.

But if you look at each of the top-performing families - Capital Research & Management (which runs the American Funds), Legg Mason, STI Classic, Calvert, WM Group and Franklin Templeton, it becomes clear that they lived off their strengths, namely the value stocks, small-cap stocks and bond funds that brought the greatest returns in a dismal 2001. Their overall negative performance reflects the lack of results in funds outside their core expertise.

At the bottom of the list were growth-fund firms such as Janus, Putnam, AIM and Invesco (which finished dead last). All had been near the top when growth was in fashion; the funds outside their core expertise - the small-caps, values and bonds - simply weren't good enough to help them overcome their primary style being out of sync with the market.

"Look at the roots of any fund family and trace them," says Gerald Perritt, editor of the Mutual Fund Letter. "There is one investment philosophy, style or strategy that they started with, and everything else built from there.

"Over time, the funds that are outside their main way of thinking always seem to be the ones that wind up doing poorly."

In the mid-1990s, as fund families grew their offerings to include every possible type of issue, investors seemed worried about convenience, consolidated statements and the ability to move money from one fund to the next in the family with just a phone call.

Even as fund networks run by brokerage firms eliminated some of the convenience issues, many investors diversified based on a line of reasoning that went something like this: "If one fund from here is good, two would be better."

The Barron's ranking - not to mention the losses suffered by investors in Janus, Putnam, AIM, and Invesco - should be enough to persuade investors to think twice before buying siblings. Because fund families tend to concentrate on what they do best, sister funds tend to move like a dance team, swaying in time to the same music. It's not a problem when the firm is on a hot streak, just when things turn cold.

"Good proper diversification doesn't always happen within one fund family, it may take two or three or four," says Tom Roseen, a research analyst at Lipper. "The people who bought from the top fund company of two years ago - Janus - haven't necessarily found that having three funds in the family is better than having just one and putting some money elsewhere."

The bottom line is that investors need to pick funds, not fund companies, focusing first on what they need and which funds work to meet that need before choosing between Company A or B.

Says Don Phillips, managing director at Morningstar Inc.: "It's like picking a wine, where you decide first that you want a Chardonnay, not that you want something from one particular winery. Your needs come first. The fact that you like a winery - or a fund firm - comes in later and maybe helps you make a final decision where you go with something that is familiar."

In the end, owning too many funds from the same family is not a major investment sin, but it may mean your portfolio is not quite as diversified as you expect, and maybe a bit more volatile.

Owning funds from a family at or near the bottom is no reason to bail out entirely. Virtually all of the families in the dumps today were high-flyers two years ago and may well regain that status. But if you are overloaded in one fund family and have lost some of the confidence you had during better days, consider rebalancing your portfolio to include the investment approaches used by other firms.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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