Report card: how the portfolios performed in '97

Kiplinger's Personal Finance Magazine, March, 1998 by Manuel Schiffres

The four portfolios in the "Best Funds" feature all provided double-digit returns in 1997 -- the likes of which would make your dreams come true if every year were as good. Only the investing-for-retirement portfolio was all in stocks and thus comparable to Standard & Poor's 500-stock index. That portfolio had a weighted return of 18.1%, versus the S&P's 33.4%. Much of the difference can be attributed to our portfolio's 30% allotment to foreign stocks, which performed poorly.

We preach the necessity of diversification, and sometimes you suffer for it. For instance, the S&P 500's results were driven by a relatively small number of gigantic companies, which some have dubbed the New Nifty 50 (see "9 Global Stocks to Buy Now," Nov. 1997). And the two foreign funds had poor years, reflecting lousy markets in Asia and a super-strong dollar.

Leading the pack were Selected American Shares and Baron Asset. Baron's results were remarkable given the troubles of many other funds that buy small, rapidly growing companies. Four other funds returned at least 30%. But PBHG Emerging Growth, a small-stock momentum fund, had a miserable year, losing 3.7%.

The international funds featured last year performed in line with their peers. Artisan International trailed the average foreign-stock fund slightly. Montgomery Emerging Markets dropped 3.1%, thought it outpaced the -4.2% average return of diversified emerging-markets funds.

Bond funds came through well. Loomis Sayles Bond surpassed the 9.7% return of the Lehman Aggregate Bond index, while Harbor Bond missed it by a whisker. Northeast Investors Trust outdid the 12.8% return of the average junk-bond fund. And Vanguard Short-Term Corporate edged the 6.4% return of the average short-term corporate-bond fund.

What follows is a summary of the changes for 1998. Keep in mind that our preference for this yearly feature is to retain a fund unless there is an overriding reason to drop it.

INVESTING FOR RETIREMENT: Westcore Small-Cap Opportunity replaces Barr Rosenberg U.S. Small Capitalization, which is expected to close to new investors soon. Berger New Generation replaces Berger Small Company Growth, which has closed to new investors. PBHG Emerging Growth is eliminated to trim the number of funds and because of its awful performance in 1997. Montgomery Emerging Markets is also dropped to trim the list and to reduce exposure to developing markets. INVESTING FOR COLLEGE: Tweedy Browne Global Value replaces Artisan international to provide a more conservative fund for holding foreign stocks. Royce Premier is dropped for trimming purposes; Artisan and Royce appear elsewhere. INVESTING FOR A HOME: Tweedy Browne replaces Artisan, as above. Royce Premier replaces T. Rowe Price Mid-Cap Growth; the latter may be a bit too daring for this portfolio. INVESTING FOR INCOME: Columbia Real Estate Equity replaces Fidelity Real Estate because it is much smaller and, presumably more nimble. Yacktman and Tweedy Browne are added as conservative stock funds, while Janus is dropped because of its sluggish performance and because a change in style by manager James Craig means that the fund may be more aggressive than it has been in the past (see "Mutual Fund Leaders," Feb.).

            TOTAL RETURNS   5 YEARS
PORTFOLIOS      1997       ANNUALIZED

Retirement     18.1%         15.0%
College        19.3          14.5
Home           14.1          11.5
Income         13.8           8.9
                                 TOTAL RETURNS
STOCK FUNDS                          1997
Artisan International                3.5%
Babson Value                        16.6
Baron Asset                         33.9
Barr Rosenberg U.S. Small Cap       30.6
Berger Small Company Growth         16.2
Fidelity fund                       32.1
Fidelity Real Estate                21.4
Harbor Capital Appreciation         31.5
Janus fund                          22.7
Montag & Caldwell Growth            31.9
Montgomery Emerging Markets         -3.1
PBHG Emerging Growth                -3.7
T. Rowe Price Equity Income         28.8
T. Rowe Price MId-Cap Growth        18.3
Royce Premier                       18.4
Selected American Shares            37.3
Yacktman fund                       18.3

S&P 500-STOCK INDEX                 33.4%
RUSSELL 2000 INDEX                  22.4%
MORGAN STANLEY
 EAFE INDEX (in dollars)             2.1%
AVERAGE DIVERSIFIED
 U.S. STOCK FUND                    22.6%
AVERAGE DIVERSIFIED
 FOREIGN-STOCK FUND                  5.2%

BOND FUNDS
Harbor Bond                          9.4%
Loomis Sayles Bond                  12.7
Northeast Investors Trust           13.9
Vanguard Short-Term Corporate        7.0

MERRILLL LYNCH CORPORATE
 MASTER BONDS INDEX                 10.4%
LEHMAN AGGREGATE
 BOND INDEX                          9.7%
AVERAGE DOMESTIC
 TAXABLE BOND FUND                   8.0%