Mutual funds doing OK

Despite market turmoil, many are having a decent year

September 04, 2007|By The Boston Globe

Even amid all the market turmoil, 2007 is shaping up as a decent year for mutual fund investors. International stock funds are up about 8 percent, and U.S. stock funds are up more than 4 percent.

The chief reason, say financial planners and investment officers, is that global worries about credit drying up have had the largest impact on areas such as bank shares and real estate -- leaving many stock, bond, and international funds to rise along with broad market indexes this year.

As a result, many financial planners say frequent whipsaw days on Wall Street this month have not changed their usual recommendation to construct a diversified portfolio and stick with it.

"We don't do anything defensively when the market's like this, even when clients call kind of panicked," said Cheryl Costa, principal adviser at Family Financial Architects in Natick, Mass.

She said it is more important for investors to construct a diversified portfolio to begin with, so that "when one part of the portfolio zigs, the other zags."

Advisers warn that fund returns in 2007 are lower than in previous years, mirroring slower growth in the overall markets. U.S. stock funds returned 13 percent in 2006 and 2004, and 8 percent in 2005, according data from Morningstar Inc. in Chicago.

Some advisers have been urging clients to expect slower growth for months.

Chuck Bean, an investment adviser with Heritage Financial Services in Norwood, Mass., says he has been moving clients into funds whose prospectuses allow them to invest in large and small companies such as the Fairholme Fund in Florida, up 9 percent this year, or the Kinetics Paradigm fund in New York, up 8 percent.

"Looking at the fundamentals with regard to the valuation of stocks, at the very least we were overdue for a correction," Bean said.

Generally, advisers suggest that people invest in a mix of domestic and foreign companies, and bonds issued by government entities and corporations.

The proportions should depend on an individual's willingness to accept risk: Investments that historically have generated the highest returns also tend to move up or down sharply over short periods, while lower-paying investments, such as bonds, tend to be less volatile.

Indexes are up

That is the story that has played out this year, driven by growth in the indexes such as the Dow industrials -- which remains up for the year despite all its recent volatility.

It is relatively simple to see which stocks face volatility based on their exposure to credit and lending issues, said Barry Glassman, senior vice president of Cassaday & Co., a financial planning firm in McLean, Va.

For instance, real estate funds are down 9 percent for the year because many realty firms' fortunes are tied to credit markets, he noted.

Similarly, what Morningstar calls "small value" funds, those that invest in small companies with relatively little risk, have lost about half of 1 percent of their value this year, much of that in the past month.

These small companies tend to have few assets to pledge as collateral when they borrow money, making it more expensive for them to obtain bank loans or otherwise tap the credit markets.

That principle does not apply to larger companies, he said, which is why funds that invest in larger companies have done relatively better.

Google unaffected

"Google isn't impacted so much by the homeowners in Fargo, N.D., taking on too much of a mortgage," he said.

So funds investing in large domestic growth companies are up 7 percent for the year; those investing in midsize growth companies are doing even better, at 9 percent.

Mutual funds have also benefited from a rush of money away from hedge funds and private equity investments hindered by tougher credit standards, said Peter Martin, executive vice president for Natixis Global Associates.

Jack Bevilacqua, an investment adviser in Peabody, Mass., said the only change he has suggested for investors amid the recent volatility is to take gains in areas such as specialized natural resources funds, up 15 percent for the year.

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