Shooting for Big Returns - mutual fund numbers

Black Enterprise, Oct, 2001 by Donald Jay Korn

MARCIA MITCHELL IS DRIVING FOR THE GREEN--AND the golfer has found the sweet spot that will get her there. While the first six months of this year landed many investors in the rough, Mitchell, with a diversified portfolio of mutual funds, remains in the middle of the fairway, her shot at the pin unobstructed. "I have time to play some golf, spend time with my family, and think about traveling," maintains this Washington, D.C., retiree. "Before I retired, I decided how much I would need to live on, and I get a check for that amount, each month, from my mutual funds. I'm not changing my strategy because I know I have a good mix of funds."

Just as Mitchell keeps a full set of clubs in her bag to help her wherever her ball happens to land, smart investors are following a similar tack--investing in a varied assortment of mutual funds so they can reap huge returns despite different market conditions. Some funds boomed while others bombed in the first half of 2001. Moreover, this year's leaders were the dogs that many investors spurned just a few years ago.

A SIX-MONTH LOOK AT THE MARKET

There were many losers. Overall, the first half of 2001 was quite dismal for stock market investors. The Standard & Poor's 500 (the index pros use as a benchmark for the U.S. stock market) lost nearly 7%, This came on top of a 9% loss in 2000. The blue chip-focused Dow Jones industrial average lost less ground, but the Nasdaq composite index, dominated by technology stocks, suffered a double-digit decline.

Many mutual fund investors felt the pain. The average domestic equity fund lost more than 6% in the first six months of the year, according to Morningstar Inc., the Chicago-based mutual fund research firm. The big-company growth funds that led the way in the 1990s lost nearly 16% in the first half, while specialized technology funds lost more than 26%. Some specialized funds that did well in 2000, those focusing on healthcare, natural resources, and financial services, produced mediocre to poor results. And investing overseas didn't help: The average foreign stock fund lost more than 14%, dragged down by weakness in European markets. (For the midyear performance of funds managed by African American asset managers, see B.E. Black Fund Watch in this issue's Money-wise section.)

There were a few winners, however. Some rays of hope broke the first half gloom. "While high-priced technology stocks continued to fall, which hurt growth funds, value stocks did relatively better," says Christine Benz, a senior analyst at Morningstar. "At the same time, the stocks of small companies outperformed those of large companies. Small banks, manufacturers, and cyclical companies did particularly well, so mutual funds holding those types of companies had good returns in the first half of 2001."

Morningstar divides mutual funds that hold a diversified portfolio of U.S. stocks into nine categories. (To evaluate the different types of funds, log on to www.blackenterprise.com this month.) In the first half of 2001, "small value" funds were up roughly 13%, bringing the 12-month return for this category to more than 25%--a good year by any standard, but especially so during a period when the broad U.S. stock market was clawed by the proverbial bear. Generally, small-company funds topped the funds that invested in the blue chips while value funds trumped growth funds.

In other words, the market has done a 180-degree turn in a three-year period. Back in 1998, Morningstar's small value category lost slightly more than 5%, while large growth funds topped the charts, returning more than 33% for the year. Technology funds, which gained 54% in 1998 and an amazing 137% in 1999, lost 33% in 2000 before dropping a further 26% in the first half of 2001, as mentioned.

Other specialized funds have seen similar reversals. Precious metals funds, which lost money during the booming 1990s, posted a 13% gain in the first half of 2001. "That gain probably was the result of investors becoming defensive with their money," says Benz. "The price of gold really hasn't moved up. However, if the world economy falls into recession and stocks continue to slide, precious metals might be a safe haven."

Real estate funds had a decent first half, too, returning more than 8%, on top of a gain of more than 26% in 2000. But real estate funds lost money in 1998 and 1999, so they're still on the rebound. "The move to value stocks has helped real estate funds," says Benz. "In addition, real estate stocks offer relatively high yields and a way to participate in an economic recovery."

SCORING WITH EQUITIES

Mitchell, who recently retired after 35 years with a local phone company (now Verizon), believes in stocks so much that her portfolio is 100% invested in equities, mainly stock funds. The conventional wisdom is that retirees should turn conservative, with a healthy allocation of their portfolios to bonds and bond funds, but "she's a very young retiree, in her early 50s," maintains Mitchell's advisor, Charlene D. Monts, an assistant vice president and senior financial advisor in the private client group at Merrill Lynch in Baltimore. "We must plan on a long retirement. She'll need growth in her investments to maintain a comfortable lifestyle, and stocks are likely to provide long-term growth."