We're Buying the Right Funds, but Is It for the Right Reasons?

Fund investors still have the performance-chasing bug, but these days it's leading them to some downright sensible choices.

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Through the end of the first quarter, the 10 top-selling funds were primarily bond funds, stock funds that meekly track a broad index and value funds that sift through the stock market's dustbin, looking for angels with dirty faces. Let's compare this vanilla but generally market-beating list with the tech-stuffed aggressive growth funds that dominated the list of top-sellers halfway through last year and are now suffering.

The exercise shows us the drastic degree to which investors burned by growth funds have changed their taste. It also leads us to ask a troubling question: If simply buying shares of funds that are ahead of the S&P 500 wasn't a good idea a year ago, is it such a good idea now?

"It's pretty clear that money always chases performance and this year they're mostly core stock funds. They're all pretty, well, boring," says Dave Haywood of Boston fund consultancy Financial Research (FRC).

Flashy they are not. There are two bond funds on the list, including top-selling juggernaut (PTTAX)PIMCO Total Return, run by guru Bill Gross. The fund soaked up almost a quarter of every buck that went into corporate bond funds last month, by FRC's tally.

The stock funds on the list include tame types like the (VTSMX)Vanguard Total Stock Market Index fund, which tracks the broad Wilshire 5000 Total Stock Market Index and price-conscious value funds like the broker-sold (NYVTX)Davis New York Venture fund, the broker-sold (ANCFX)Fundamental Investors fund and the no-load (OAKLX)Oakmark Select fund, which has taken in so much money that it's set to close to new investors next week.

And most of the growth funds on the list hail from fund shops known for their conservative style, like American Funds ((AGTHX)Growth Fund of America) and MFS ((MIGFX)MFS Massachusetts Investors Growth fund).

This Year's 10 Faves Only one of the this year's 10 top-selling funds trails the S&P 500 over the past 12 months.
Fund	1-Year Return
(PTTAX)PIMCO Total Return	12%
(AGTHX)Growth Fund of America	-9.9
(FDGFX)Fidelity Dividend Growth	6.2
(VTSMX)Vanguard Total Stock Index	-14.5
(NYVTX)Davis New York Venture	-7.8
(VBMFX)Vanguard Total Bond Market Index	11.9
(CABDX)Alliance Growth & Income	10.8
(MIGFX)MFS Massachusetts Investors Growth Stock	-22.5
(ANCFX)Fundamental Investors	-3.9
(OAKLX)Oakmark Select	29.5
S&P 500	-14.5
Sources: Financial Research and Morningstar. Returns through April 26.

It makes sense that investors are in the market for funds that won't swing for the fences after top-selling tech and tech-heavy growth funds lost so much money.

The Nasdaq Composite is down 45% over the past 12 months and the average tech and big-cap growth funds are down 48% and 25%, respectively, over the same period. Investors looking for funds with less volatile styles, as well as those looking for funds beating the S&P 500, would gravitate toward the funds on this list. All but one are beating the popular benchmark over the past 12 months.

"There's a clear feeling that people are looking at more conservative investments," says Haywood. "These are also going to come up when you screen for performance."

These funds are also a clear departure from the top-sellers through the first half of last year. At that point, investors were still sick with the tech flu. All top-selling funds were firmly in the growth camp, including several Janus funds that had to close to new investors due to steep inflows, like the (JAWWX)Janus Worldwide fund, the (JANSX)Janus fund and the (JAGLX)Janus Global Life Sciences fund.

Last Year's Models Among the 10 best-selling funds through the first half of last year, only two top the S&P 500.
Fund	1-Year Return
(JAWWX)Janus Worldwide	-26.7%
(FDGRX)Fidelity Growth Company	-27.3
(FDEGX)Fidelity Aggressive Growth	-40.1
(AGTHX)Growth Fund of America	-7.8
(JAENX)Janus Enterprise	-42.2
(JAMRX)Janus Mercury	-32.7
(AEPGX)EuroPacific Growth	-19.8
(JANSX)Janus	-24.9
(JAGLX)Janus Global Life Sciences	-1.8
(POVSX)Putnam International Growth	-15.7
S&P 500	-14.5
Sources: Financial Research and Morningstar. Returns through April 26.

A quick comparison of the current top-sellers and this growthy bunch from last year makes you think investors are making progress. This year's top sellers have fallen just 5.1% over the past year through March 31, compared with a 38% tumble for the faves through the first half of last year. This year's top-sellers also came out on top over the past five years.

Stacking Up the Best-Sellers

Source: Morningstar. Returns through March 31. PIMCO Total Return, Oakmark Select and Janus Global Life Sciences lack five-year returns.

Beyond topping Last Year's Models, the current best-selling funds also have had a less bumpy ride. The bond and more conservative stock funds' worst year in the past five was just a 5.1% loss from March 2000 through March 2001. Last Year's Models lost more than 38% over the same period, according to Morningstar.

If you're not familiar with beta, it's a measure of a portfolio's volatility vs. the S&P 500. A beta of 1.0 is equal to the index, with a lower number indicating less risk and a higher number indicating more volatility.

The Worst of the Best A look at the risk levels of this year's best-sellers compared with last year's speaks volumes about investors' appetite for risk.
	2001 Top-Sellers	Last Year's Models
Worst Quarter	-10.8%	-21.8%
Worst Year	-5.1	-38.3
Three-Year Beta	0.76	1.11
Source: Morningstar.

Before we get bursitis from patting ourselves on the back, keep in mind that simply buying shares of funds with better performance than the broader market doesn't typically work out well and might not work out this time.

The risk here is not in buying these generally solid funds, but rather in operating without a consistent plan and simply buying whatever's working.

"You need to decide how much you want to have in different types of stocks and how much you want to have in bonds. Then you need to stick to that," says Harold Evensky, a financial planner with Evensky, Brown & Katz, based in Coral Gables, Fla. "It's a problem if people are coming out of aggressive growth stock funds and into bond funds. When the market moves, they'll decide to dump their fixed-income fund. There's a danger they'll buy high and sell low. That's what might be happening and that's a real shame."

The bottom line is that the funds investors are buying these days deserve to be a core holding in many portfolios. The question is whether or not investors will hang on to them if tech and growth funds charge north again.

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