Fund Picks for 2004

It's easy to criticize the investment industry for all its shortcomings -- scandals, high fees, lousy performance. But on the plus side: The industry gives you a thousand different ways to make bets on the market.

Specialized mutual funds and exchange-traded funds slice up the market into little pieces, allowing investors to make specific bets on areas they think will do well. When properly employed, these offerings can serve as solid diversifiers in a well-balanced portfolio -- and give investors the opportunity to try to outperform the broader market.

With that in mind, let's take a quick look at a few arenas that are poised to do well in 2004, and highlight some solid mutual fund and ETF offerings that enable you to ride the trends. But keep in mind: Sector and regional bets can be highly volatile and are best made in small doses, say 5% to 10%.

Japan

Back in June, I wrote a column suggesting that it was finally time to consider investing in Japan after more than a decade of devastating declines. And the Nikkei 225 returned 24.5% for the year. While 2004 may not be quite as robust, plenty of big-cap Japanese multinationals such as Sony(SNE Quote) and Honda(HMC Quote) still look cheap relative to U.S. peers. Meanwhile, according to some experts, small-cap Japan looks even better.

Investors looking for good Japan funds have a few excellent options. As far as actively managed mutual funds go, my two favorites are the (MJFOX Quote)Matthews Japan fund and the (FJSCX Quote)Fidelity Japan Small Companies fund. The Matthews Japan fund, which sports a 2% expense ratio (below the category's 2.28 average), makes bets of all sizes in Japan, and its 9.17% average annual return over the past five years tops 87% of its Japan fund peers. Investors looking to make a bet on Japanese small-caps would be hard-pressed to find a better option than the Fidelity offering, which ranks in the top 1% of all Japan funds over a one-, three- and five-year period. Kenichi Mizushita manages the fund, which sports a slim (for the category) 1.19 expense ratio.

For the ETF proponents, the iShares MSCI Japan Index fund(EWJ Quote) is an ETF that tracks the portfolio of the MSCI Japan Index. The strongest selling point of the fund is its low expense ratio of 0.84%, but the 38.7% return in 2003 is a ringing endorsement as well.