the great fund round up

Black Enterprise, April, 2001 by Donald Jay Korn

This year, you can profit by spotting Grade A investments, and avoiding bum steers

GUY MANNING SR. KNOWS A PRIME CUT WHEN HE SEES IT. THE BASKETBALL-PLAYER-CUM-CATTLE rancher also knows a thing or two about top-grade investments. In a stock market that has bucked as hard as the orneriest bronco, the Oakwood, Texas, cowboy developed a rock-solid strategy: corralling a diversified mix of mutual funds that can ride out the peaks and dips in the market.

The virtues of such diversification have not been lost on Manning, who recalls his days with the NBA's Baltimore Bullets and St. Louis Hawks, when salaries were a notch or two below today's levels. "I grew up on a farm in Oakwood," he says, "so whenever I saved a few dollars, I'd buy 25 or 50 acres there. Then I went to work for the phone company and kept putting my money into farmland and mutual funds. By the time I was offered an early retirement package, I was ready to be a cattle rancher."

Manning, who now owns nearly 1,000 acres, raises beef cattle and supplements his income through oil leases. Therefore, his financial success is dependent on commodity prices. And his mutual fund strategy is critical. "I want to get a better return than I'd get from a bank account," he says, "without taking a lot of risk with this money."

To achieve this goal, Manning's financial planner, Matthew Reading of Austin, Texas, has helped him design a balanced portfolio. "For growth," Reading says, "I suggest the QQQ." That's the ticker symbol for Nasdaq 100 Shares, a fund that trades like a stock on the American Stock Exchange, tracking the Nasdaq 100 index, which is heavily weighted in technology stocks. This fund soared in 1998 and 1999, but stumbled last year, when tech fell out of favor.

"For balance," says Reading, "Guy's portfolio holds Vanguard Value Index Fund (VIVAX), which holds the low-priced value stocks in the [Standard & Poor's 500-stock index]." Like most index funds (especially Vanguard index funds), it is a low-cost, tax-efficient fund because the managers do relatively little trading.

Manning's approach will be the one that herds of investors will need to employ to achieve double-digit gains in the years ahead.

* GROWTH INVESTORS SEARCH FOR A BONANZA

What a difference a year can make. After 1999, investors who went into "growth" mutual funds, vehicles that had explosive earnings prospects, were gloating. Specialized technology and communications mutual funds racked up outsized gains that year. Going global, Japanese and other Asian stock funds posted stunning results.

Fast-forward to the end of 2000. So far, the new millennium hasn't exactly been a bonanza for growth investors. Tech stocks peaked early in the year and then slid. By year-end, according to Morningstar Inc., the Chicago-based mutual fund research company, large-cap growth funds were down roughly 14.09% and specialized technology sector funds produced a 33.13% decline for the year. International funds, particularly those focused on Japan and Asia, plunged, too, losing an average of 31.92% of their value in 2000.

"Some mutual funds, especially Internet funds, were hype funds, sold to investors who thought trees would grow to the sky," says Dywane Hall, a principal in the Alexandria, Virginia, office of LPL Financial Services. "When technology stocks fell after the first; quarter of 2000, some investors had severe losses, perhaps the first losses they had ever experienced. Some funds fell 60% to 80% from their peaks last year."

Nevertheless, while the broad U.S. stock market registered its worst year since the 1970s, many mutual fund investors found reason to cheer. Value funds--the laggards of 1998 and 1999 that hold out-of-favor, bargain-priced stocks--led the way. In fact, small-cap and midcap value funds had healthy double-digit returns, due largely to the energy and financial stocks in their portfolios.

Indeed, specialized energy and financial funds performed well in 2000, but the leader was the healthcare sector, where the average fund produced a return of 55.4% for the year, thanks to wide-ranging strength among pharmaceuticals, biotech, medical devices, hospitals, and HMOs.

Aside from this seesaw stock market, bond funds were strong in 2000. Funds holding long-term Treasury bonds gained nearly 15.04%, while most other types of bonds funds (corporate, government, and municipals) had total returns of around 9.78%, a satisfying result in a year when the Dow Jones industrial average fell 4.85%.

What lessons can you learn from such varied results? "In 2000, we saw that the principle of asset allocation still works," says Jerry Mosher, a financial planner in Lafayette, California. "For the past few years, people wanted only one class of stock, large-company growth stocks, because that category was doing so well. In 2000, we saw value stocks outperform growth stocks while small and mid-sized companies beat large companies. Investors learned that it pays to spread their risks over many different types of funds."

For some investors, though, this was a painful lesson to learn. "Some investors insisted on putting everything into technology stocks and tech funds," says Mosher. "In some cases, a $1 million portfolio became a $300,000 portfolio after tech stocks collapsed."