Brenda Buttner's Sage Online Chat Transcript

Brenda Buttner chatted on AOL's Sage Online on Oct. 14. The unedited transcript follows:

Sage Host: Sage is proud to present a Quarterly Roundtable with Brenda Buttner, contributing editor for TheStreet.com, and Alan Cohn, co-founder of Sage: "Making Sense of Mutual Funds." Please welcome Alan and Brenda!

Question: How did you get started in your careers?

Buttner (TSC): I had a degree in economics but soon learned that pure theory has nothing to do with what happens in the market. I covered Washington D.C. for CNBC (the city where politics equals money) and then continued into personal finance. It has been a fascinating ride!

Cohn (Sage): I started as Certified Financial Planner in 1986. In 1994, I started using the Internet and realized what a wonderful way it was to reach people and help them make more informed decisions. I then formed Sage Online with my brother Stephen and worked with Money Magazine on their website for two years and launched our site on AOL, Keyword "Sage," in August 1996. The rest is history.

Question: Brenda, do you think White Oak is a good fund to add to now, or would you wait until the new year and let some dust settle?

Buttner (TSC): White Oak has a terrific long term record. Jim Oelschlager has been great at taking big bets in a concentrated fund. He thinks technology will be the driver of the economy for decades to come and has held big tech names such as Cisco, Intel long before they became darlings of the market. But he has had a very tough year of late -- in part because some of those stocks (indeed, the sector) took a beating. I own it and have not sold it, but whether you buy now or not depends in large part on your risk tolerance. Expect some bumps!

Cohn (Sage): I agree with Brenda, and in fact, White Oak is one of the four mutual funds in the Sage Expedition Portfolio that we track on our site. White Oak invests in three sectors primarily -- financial, health care, and tech -- all of which are foundations of our economy. Assistant manager Doug MacKay has been a frequent guest in our chats and is one of the most savvy investors that we have met (after Brenda, of course!).

Buttner (TSC): I am blushing.

Question: Brenda, do you still think a small Real Estate Investment Trust (REIT) position is good diversification? Would you add a fund right before year end, with distributions around the corner?

Buttner (TSC): REITs and real estate funds in general are SUPPOSED to be great defensive plays in a down market, but they have not lived up either to their fundamentals or their reputation. (Not many "supposed tos" have actually worked in this market, which has defied expectations.) I think REITs have probably bottomed and will be a good play in months to come, but you bring up a good point about adding new funds now as funds prepare to distribute capital gains. Be sure to call the fund company and ask when they will distribute as you do not want to get hit right after buying.

Question: I am not happy with the Janus Twenty Fund [JAVLX]. Is it just the way the market is right now or am I missing something?

Cohn (Sage): To some extent, Janus Twenty's recent performance is a result of the current market environment. Long term it has been a good investment and under the new leadership of Scott Schoelzel it should continue to be a good long term holding . He formerly managed the Janus Olympic Fund that had a very good record. Janus 20 was actually one of the better performers in the third quarter of 1998, as it lost only 1.54 percent in the quarter.

Buttner (TSC): Janus 20 is unapologetically a growth fund, which means that in this environment, of course, it would lose some money. But be careful to judge it against its peers -- use relative, not absolute performance. It did quite well -- perhaps not the eye-popping returns it had in the last three years, but still it did not go down as many others did. Schoezel has proven that he can walk in Tom Marsico's footsteps and the fund is well poised to do well when growth stocks start picking up again.

Question: What no load mutual funds do you feel would be good to invest into at this time?

Buttner (TSC): I think that depends, of course, on your time horizon and risk tolerance. And those are not just platitudes -- it really depends on how long you plan on keeping the money and how well you can sleep at night with volatility. That said, I think that you might look into balanced funds given the flight to quality with bonds we have seen. These funds invest in both bonds and stocks. As for small caps? I do not know -- a lot of experts are saying that their time is right around the corner. I am more skeptical.

Cohn (Sage): Sage believes that if your time horizon is five years or longer it is always a good time to I invest in a solid no load mutual fund. However, you should invest over a period of time, not in one lump sum, perhaps over six months, being careful not to invest within one month of the fund's dividend distribution date.

Question: What can I expect from Franklin's Small Cap Fund?

Cohn (Sage): It is very difficult to predict the performance of a particular fund. However, Franklin has been a good performance in the past and has been experiencing some difficult times due to its holdings in the small cap technology sector.

Question: Do you like index funds better than a portfolio of large cap focused funds and sector funds?

Buttner (TSC): I have always thought that index funds, with their tax efficiency and low expenses, should be a core part of almost anyone's portfolio. Lately, I have become even more of a fan in large part because of performance in this third quarter. Index funds were always supposed to do worse than actively managed funds in a downturn, because this was a chance for managers to really show their stuff. Instead, the opposite has occurred and we are once again on track for a fifth year of underperformance by U.S. diversified funds against the broader index. Active managers DO have a part in your portfolio -- the key is to find the right ones and lately that has been more difficult than usual.

Cohn (Sage): We believe that both index funds and focused funds have a part in one's portfolio, given that different styles tend to go in and out of favor. Sector funds are only appropriate for those investors that have a high risk tolerance, as frequently they are more similar to individual stocks than they are to diversified mutual funds.

Buttner (TSC): Yes, I agree on the sector funds issue -- you are almost always making a market call with them. That is fine, but watch what happened with financial sector funds this year. They were the top performing sector of the one-, three-, five-, and ten-year periods until this summer, when they imploded. You have to expect that kind of volatility.

Cohn (Sage): By the way, it was not too long ago that I recall the health care sector funds having similar periods of outperformance.

Question: What is the key point to Roth IRAs?

Cohn (Sage): The main benefit of Roth IRAs is that your money grows tax deferred and can be withdrawn tax free after meeting certain holding period requirements. The disadvantage of Roths is that you do not get a current tax deduction for the contribution. However, studies have indicated that the benefits of tax free withdrawal frequently outweigh the disadvantage of not receiving the tax advantage up front. Whether or not a Roth is good for you depends on your individual circumstances. However, anything that encourages you to save for retirement is a good thing.

Question: Do you see any one particular sector as being a good growth prospect?

Buttner (TSC): I think that long-term it is tough to bet against technology. It has fueled our productivity gains for the past few years and will continue to be a fast growing part of our lives and work. But does that mean technology will only head up? Uh-uh. As we have pointed out, sector investing means a wild ride, often, and this sector in particular seem to go from being a favorite of the market to one hardest hit.

Cohn (Sage): I agree with Brenda on the technology sector. Other impressive sectors include health care, services, and, despite what recent market events may indicate, financials.

Question: Should we buy international funds or stay out for a few years?

Buttner (TSC): I say yes to international investing. I said it before Europe took off, when Europe was struggling, and even now. But I say it because my goals are a ways off, and I can look beyond the red flags (and there are plenty of short term ones) because I believe the structural argument for buying overseas -- in particular, Europe -- remains intact. Interest rates are down, inflation is low, and finally the overheated market has plunged, which means there are opportunities. Plus there are other powerful forces at work: corporate restructuring is one the rise, new tax laws are spurring buybacks, and privatizations mean there are more good companies to invest in. Also, a U.S.-style focus on shareholder value is gathering steam, so I think a good diversified international fund with a manager who understands Europe makes sense. I, however, do not have the stomach now to plunge into the emerging markets even though there is value to be found in many Latin American countries and companies.

Cohn (Sage): At the risk of sounding like a puppet, I agree with Brenda. However, one area of concern, especially internationally, is the Year 2000 computer problem and how developing countries will address this issue. Therefore, I would stay with more mature economies, such as Europe, as Brenda mentioned.

Question: Do you see small caps rebounding any time soon?

Cohn (Sage): It is difficult to predict what will happen "soon." However, we do believe that small caps offer an attractive opportunity over the next three to five years and they are undervalued relative to large caps.

Buttner (TSC): I am dusting off my crystal ball. (grin) They certainly have been "due" for a rebound for years now and no sector has been harder hit. Small cap investors have known the smell of the bear long before many of the rest of us. There are certainly good values there; the question is, will the market realize that? I fear that the newly risk-averse investor will steer clear for some time.

Question: What is the single most useful thing to know when investing in funds?

Cohn (Sage): The most useful thing to know is that time is on your side. If you have the ability -- both emotionally and financially -- to ride out market downturns such as the one we saw recently, you will be rewarded with returns that exceed those of most other investments, assuming you are investing in good solid equity mutual funds. Over time the power of compounding will accentuate benefit.

Buttner (TSC): Yes, it is definitely TIME, not TIMING, that counts. We tend to forget that when looking at our third quarter statements! You have to look at a longer time period and recognize that these investment vehicles are among the best around, providing management and diversification all at the same time. That said, though, it is important to choose the right ones for your portfolio and that means some work on your part: checking out track records (in all kinds of markets), fees, risk measures, etc.

Question: Mr. Cohn, for seniors investing for income in treasury bond funds, where can they turn for more income?

Cohn (Sage): First of all, a word of caution: More income frequently means more risk, as investors in high yield funds realized last quarter. Assuming that you have the emotional makeup to handle wide fluctuations in principal, high yield junk bond funds can provide higher income.

Buttner (TSC): Yes, remember that junk, or high yield, were the most popular investments around last year; now it is hard to find such a fund with inflows! Also one word of caution about bond funds: Many seemingly conservative sounding funds actually packed their portfolios with high yield and corporate bonds when those type of investments were doing well, which is why they so underperformed this last quarter.

Question: I have noticed that many "value funds" have performed terribly. What are your thoughts?

Buttner (TSC): Yes, this is one of the conundrums of this market. Value funds SHOULD have done well in this type of market. But a lot of "shoulds" didn't! Some of the finest managers and fund families -- David Schafer and the Mutual Series funds, for example -- have not performed as expected in a down market. The problem has been, in part, the continuing flight to the blue-chip big names. Investors did not care that stocks were a bargain; they wanted no part. Until that sentiment changes, value funds will have problems.

Cohn (Sage): Many value funds currently have a large percentage of holdings in financial stocks, which were beset with overseas woes. Historically value funds have been less volatile than growth funds. However, as we are painfully aware, in the short run anything is possible.

Buttner (TSC): Yes, I think many of these funds are run by good managers who did not turn "dumb" overnight.

Question: Alan and Brenda, are we in a dead cat bounce or has the market turned around?

Cohn (Sage): Well, I frequently argue with SageMath over this one. I tend to not focus on whether or not the cat is alive or dead, but rather what its life expectancy is. What I mean is that it is important to focus on long term objectives and ignore short term fluctuations.

Buttner (TSC): Have we bottomed or not? It is hard to tell, but here is what is troubling: Many of the things that brought a lot of stocks down -- corporate earnings troubles, global turmoil, overheated markets -- are still in place. So a bear market? Yeah, we are still in one, however it is unlike many we have seen in that a recession is not accompanying it and there are many economic fundamentals that suggest it will not be much more protracted: wage growth is up, unemployment is low, inflation is low, consumers are spending, government finances are the best they have been in decades. And keep in mind that if you have been in the market for more than a few years, you have made money.

Sage Host: How did you enjoy your Sage FundTalk?

Buttner (TSC): I loved it! Great questions and a great partner! Thanks to all for inviting me!

Cohn (Sage): I had a ball! Please invite me back! Thank you for all your help, Brenda, you made me look good!

Sage Host: Thank you to Alan and Brenda and thanks to all who attended!