This Saturday piece compiles our Fund Forum Q&As from throughout the week. (They appear every day around noon.) Remember, you can send your question, with your full name, to email@example.com
Monday's Topic: You've Named the Worst Funds; Now Nominate Your Favorites
Last week, I gave you the chance to unload your anger and name the one fund that you regret buying or simply owning in 1998.
Robertson Stephens Contrarian was the easy winner of the I Want My Money Back award. (For the results and some biting commentary, see
Now for a change of attitude. Tell me about your best fund or the one fund that you are thankful you owned in 1998. Will you be hanging onto your pick for next year, or will you lock in those gains and get out?
Send the name of the fund and all your thoughts to me. I will be posting the results later this week.
Before we leave the topic of bad fund investments behind, let's hear a few parting comments from some readers whose advice, though stinging, might come in handy next time around.
"This was classic! The funds that were 'winners' were all funds showing great performance last year or over two years," writes
. "The funds mentioned were hyped via TV or 'hot picks.' The one exception is the Contrarian fund. It just goes to show how easy it is to influence Americans, especially when it comes to money and the market. It is sadly obvious that the line 'past performance is no guarantee of futureresults' is largely ignored."
adds: "That was an interesting article, your winners of the worst funds. It would be better titled 'Whiners
Who Are Owners of the Worst Fund.' It looks like a great example of unrealistic expectations, combined with a swing-for-the-fences attitude toward volatility/risk ... until it goes down. Niche funds, sector funds, chasing last year's heroes with little or no understanding of risk. The cure for this is called an investment policy statement and proper asset allocation. If you can't do it for yourself, then hire a pro."
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Tuesday's Topic: Let Us Now Praise Favorite Funds
Market-beating returns obviously aren't as exciting as full-blown investment disasters.
Readers were less eager to praise their favorite funds than disparage the ones that left holes in their portfolios this year. The email response I received for the
"I Want My Money Back" award -- emails are still pouring in, by the way -- far outweighs that for the best funds of the year.
Nevertheless, two fund families readily emerged as the biggest winners. You could probably guess the names. Here's a hint. They were the ones that didn't receive any hate mail.
Give up? They are
Janus Twenty was easily the favored fund among
readers. If you owned this fund through 1998, how could you not love it? With a concentrated roster of stocks, manager Scott Schoelzel, who took over the fund after Tom Marsico left to start his own firm last year, has produced a year-to-date return of 51.3%, according to
"My favorite fund for 1998 is easily the Janus Twenty fund," says
. "I have owned this fund for a number of years, and this year they clearly hit a home run. I will continue to hold this fund, although it is unlikely they will have another year like '98."
Investors didn't overlook other members of the Janus family. "The
Janus fund: Consistent returns and a good night's sleep. I will keep the fund next year," writes
Janus Mercury also has its share of fans. Janus and Janus Mercury are up 22.1% and 36.5% this year, respectively.
Vanguard shareholders seem to love the low fees as much as their returns, and naturally investors have an affinity for the $69.5 billion
"My favorite fund is Vanguard Index 500. Most fund managers don't beat the
, so I see no compelling reason to pay the higher management fees and higher capital gains in addition to a most likely lower return," says
Craig W. Brewer
seconds that notion. "I simply can't imagine a goodreason to invest in an index fund with anyone but Vanguard. If you want topay lots of expenses, at least take a chance with a stock-picker's fund."
This giant didn't garner all the praise. Readers also pointed to the
Vanguard Health Care fund, the
Growth Index fund and the
Vanguard U.S. Growth fund.
"Vanguard Health Care and Vanguard Growth Index don't have the public visibility of the Vanguard 500, but they are putting up solid numbers for shareholders," says
The Vanguard Health Care fund has returned 32.3% this year, driven bythe strong performance of pharmaceutical stocks. "Ed Owens, the manager,has been with the fund for about 100 years. . . . I'm happy and willcontinue to hold this fund for the foreseeable future," says
Actually, Owens, who works for
, has been running the $8.39 billion fund since 1984 and has indeed put up some impressive numbers this year. (But remember that the performance of this fund hinges on its sector.)
Despite managing more assets than any other fund company in the nation,
only received two endorsements. Here's one.
"My favorite fund is Fidelity's
Dividend Growth. I started to invest in this fund in 1993 because I liked their investment strategy and have continued to put money in it over theyears since. If I have one regret, it's that I haven't put more money init," says
The remaining favorites are an eclectic group of funds -- some recognizable and some a bit more obscure.
"No doubt about it,
Longleaf Small Cap has to be one of the best funds around," says
. "I will liquidate my holdings when I am 65; that's 28 years away.Sorry, but they closed the doors."
Legg Mason Value Trust,
T. Rowe Price Blue Chip Growth and
Bramwell Growth are three of the many that earned single mentions.
makes a valid point. "Let me say that I think the fund family is important as well. I would nominate
as oneof the best. I have owned the
Washington fund for nearly two decades. It has consistently given me results without scares, in up and down markets," he writes. "Great management, great fund performance, great fund."
If only all investors could have that reaction to their funds.
Still, keep in mind there's no guarantee that these funds that did so well in 1998 will do so again in 1999. I know your eyes glaze over when you see yet again the phrase "past performance does not guarantee future returns." But if you ignore it, you could find yourself contributing to next year's column on "Funds I Wish I Didn't Hold in 1999."
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Should I Invest in an Annuity Within My 401(k)?
Does an annuity within a 401(k) plan make sense? My wife is beingoffered an annuity within her plan. After reading
primer, it seems themain beneficiary is the agent offering the annuity. My wife is 47 and doesn'texpect to need the money until 60 or later. -- Stephen P. Buck
Most of the financial planners I spoke to didn't have many positivethings to say about using a variable annuity within a 401(k) plan.
"Absolutely not," cries Ben Tobias of
Tobias Financial Advisors
.Others weren't quite as adamant, but you get the picture.
With a variable annuity, you are getting a mutual-fund-type account withan insurance wrapper that provides tax deferral of the investment earnings.
By buying an annuity within a 401(k) plan, you are investing in atax-deferred vehicle within a tax-deferred vehicle. That's simply notnecessary and could be very costly, according to some financial advisers."It's obvious that it's redundant," says Vern Hayden, head of the
in Westport, Conn., and a
"I personally don't see any benefit whatsoever putting an annuity in anIRA or any form of qualified plan," Tobias adds.
"The annuity costs you extra money effectively to get tax deferral thatyou already have in the 401(k)," adds Robert Levitt, a financial adviserwith
Evensky Brown Katz & Levitt
in Boca Raton, Fla.
And there are plenty of extra costs to consider. In a variable annuity,you will pay the expense ratio or investment fee of the underlying mutualfund or portfolio. Then there are "mortality and expense" charges. Theseare the annual fees that you pay for the insurance wrapper that typicallyrun 1.25% to 1.45% a year, according to Jean Sullivan, a consultant at
If you buy a variable annuity outside a 401(k), you generally won't pay an upfront sales charge. But most variable annuities carry surrender charges that you incur if you switch toanother annuity or take your money out before a stated period of time,generally seven years, Sullivan says. (Think of the B shares of mutualfunds, she adds.) Investors also may pay for increased principal orincome-stream protection, for which fees can run up to 30 basis points. How these costs are handled within a 401(k) is a question you'd have to put to the plan's administrator.
If you want the annuity's minimum guaranteed death benefit, Haydensuggests that you buy a simple insurance policy directly.
All that said, there are exceptions.
There are some annuities that don't carry surrender charges and have lowexpenses. Perhaps the annuity that you are talking about is the fixed kind,which I did not address. Also, some retirement plans may offer
annuities. 403(b) plans, which are for nonprofit and tax-exempt organizations, were once annuity-only plans, says Ron Roge of
R.W. Roge & Co.
. "Now youare seeing 403(b)s offering mutual funds."
Most importantly, I don't know what your wife's other investment optionsare. "What are your costs and what are your choices?" asks David Diesslinof
Diesslin & Associates
. "It's not really just about cost, it'sabout return." Here are some guidelines for your wife to weigh thedecision:
- Compare the annuity and the other options in the plan. Is the annuity more expensive than a comparablemutual fund that comes without the insurance wrapper? Can your wife find anacceptable but cheaper choice in the plan?
Does the annuity offer anything unique that your wife needs, somethingthat can't be obtained in another way? Perhaps she can get exposure toa particular investment style or sector of the market only through this annuity.How good is that investment?
Are your wife's other 401(k) options also high-expense products withhefty loads? "The choice may come down to a lesser of multiple evils," saysLevitt.
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Lessons for Disheartened Fund Investors
What turns an ordinary mutual fund into the investment equivalent of an orchestra seat at
Mostly hot returns, a lot of advertising and some good press.
But celebrity and market-crushing performance don't last forever. (Geez, sometimes they don't last more than a calendar year.)
Keep that in mind when choosing your next fund. Today, I'll look at five once-hot funds that have turned into some of our readers'
biggest investment regrets. Their experiences are instructive.
You've seen the ads touting the
Kaufmann fund's No. 1 status. Of course, you've probably also noticed how those tag lines change to fit the fund's current record.
In the April 1998 issue of
, Kaufmann's ad read "#1 General Equity Fund for the Ten Years Ending 12/31/97." By the November 1998 issue, a very similar ad had changed to "#1 Small Company Fund for the Ten Years Ending 6/30/98." And these are just two examples.
The advertisements tout the fund's long-term record and certainly avoid singling out Kaufmann's recent performance. This year, the fund is down 6.4%, trailing the
Vanguard Index 500's 21.5% return but outperforming the 10.8% drop in the
small-stock index, according to data from
"Their advertising is contrived, always touting returns since inception, avoiding the fact that it's done nothing in recent years," complains reader
. "I'd love to see them advertise their current returns," adds
Kaufmann put up its biggest numbers in the late '80s and early '90s, when its assets were in the low millions. In 1995 and 1996, the fund delivered some admirable returns, 36.9% and 20.9%, respectively, but nothing close to some of its earlier gains. Plus, the expense ratio, including a 0.37% 12b-1 fee, is a lofty 1.89%, according to Lipper. The average equity fund's expense ratio is 1.5%.
The returns have not been dreadful, but that No. 1 crown is certainly lopsided. "I very much regret owning the Kaufmann fund. I had some money I wanted to invest, and I got glitzed by their smooth marketing campaign," says
. "They are very disappointing."
Lesson: Look beyond -- or just ignore -- the ads. Before buying, compare a fund's returns with appropriate benchmarks and with its peers. Don't rely on the fund company to do it for you.
20th Century Giftrust
20th Century Giftrust was once a great present.
For years, the small-cap fund's performance was remarkable. Giftrust delivered a 22.1% average annual return from its late-1983 inception through the end of 1995, and it was up 84.9% in 1991 alone. But performance made a nasty 180-degree turn after 1995. This year the fund is down 22%, while its three-year average annual return is minus 5.7%.
"My father bought this fund for my two boys so they could go to a better school when the time comes. Unfortunately he bought the fund when it was at its peak. The fund has fallen in price ever since," writes
. "If it falls much more, I am going to owe it money when my kids start college."
Unfortunately, many investors in the fund can't get out. Shares must be purchased as a gift, and the recipient cannot redeem shares for at least 10 years or until he or she turns 18.
"I tracked 20th Century Giftrust for years. I finally bought it for my grandchildren based on its excellent record. Now it's in the dumper," laments
. "I may as well have bought the kids U.S. savingsbonds."
Lesson: Even a fund that does well for a long time can wind up in the dirt. Nothing is safe, and there are no guarantees.
Brandywine's Foster Friess spent years building his prominence as a fund manager, earning myriad admirers and shareholders along the way. But Friess' radical moves in and out of cash this year hurt returns and sullied his rep with investors.
"Brandywine is my dog of the year," says
. "It started when our buddy tried to time the market by going high into cash."
After going to about 70% cash at the beginning of the year, Friess then jumped back into the market in spring, just in time to get hit with the third-quarter market blowup. Friess has insisted he wasn't market-timing. Whatever you call it, his timing couldn't have been worse. The fund is down 8.2% this year.
"Too bad Foster didn't have enough confidence in himself to wait until October this year for his buyback plan," says Zuber.
Lesson: You pay your manager to take bets. Sometimes he wins, and sometimes the shingles get blown off the building.
Van Wagoner Emerging Growth
By 1996, manager Garrett Van Wagoner had achieved
-like popularity. After delivering a 69% return in 1995 on the
GovettSmaller Companies fund, Van Wagoner set off on his own to open an eponymous investment-management firm. In their first few months of life, his three original funds took in $1 billion.
But the market was much less kind to aggressive growth style. His
Emerging Growth fund ended 1996 up 26.9%, fell 20% in 1997 and is down 6.4% this year.
"I bought into the Van Wagoner Emerging Growth fund in February 1997 andI want my money back. Not what's left ... all of it," cries
. "This was my foray into individual investing. I learned immediately after the turn south NOT to buy a fund whose manager is the media darling, that the obvious usually doesn't work, yadda yadda, yadda."
Lesson: Don't be lured by a manager's celebrity or his once-megawatt numbers.
Lexington Troika Russia
Some people just can't resist the latest craze, and last year Russia was it. The
Lexington Troika Russia fund returned 67.5%, ranking as the fourth-best equity fund tracked by Lipper. Russia was going to be the next, well,United States.
This year, with Russia's collapse, the fund is down 82.9%.
Lesson: Sometimes the best ain't the best for long. Delve deeper than theranking before buying, and diversify, diversify, diversify.
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Friday's Topic: Fixed-Income Payouts and Timing on TIPS
Which type of fixed-income fund pays out the most in dividends, interest and capital gains?-- Pete Hoban
Dividends and interest are one and the same with bond funds, and the types that pay the most are the types that invest in the bonds with the highest yields. The highest-yielding bonds are either those with the longest maturities (a 10-year note yields more than a five-year note of the same type), or the poorest quality (a BBB-rated bond yields more than an AAA-rated bond of the same maturity). In either case, the higher-yielding bond entails more risk to your principal.
to rank the categories of bond funds by the amounts of income, capital gains and total distributions per dollar invested over the past five years. The top three income producers were emerging-markets debt funds, which distributed 9.5 cents per dollar invested over the past five years; high-yield funds, which distributed 8.9 cents; and multisector income funds (which can invest in high-yield bonds), which distributed 7.5 cents. Most of the other categories distributed between 5 and 6.5 cents on the dollar.
As for capital gains, as a general rule you can expect the same categories that distribute the most income -- the ones that invest in the highest-yielding bonds -- to also distribute the most capital gains, says Mark Riepe, vice president of the
Schwab Center for Investment Research
. While your principal's at the most risk in those funds, they also offer the most potential for price appreciation.
TIPS Appear Cheap
Last week, I named a couple of funds that invest in Treasury Inflation-Protected Securities, or TIPS. I missed one:
PIMCO Real Return Bond. The fund invests primarily in TIPS, but can also invest in non-U.S. inflation-indexed securities and in other fixed-income instruments.
Inflation-Linked Bond Account for investors in its annuities, which are available only to people in education or research whose employers offer TIAA-CREF as a pension-fund option.
Thanks to readers
for pointing out those options.
The item prompted
to ask: When is the best time to buy TIPS?
The best time to buy anything is, of course, when it's cheap. So how do you know when TIPS are cheap?
Regular Treasuries yield more than TIPS to compensate investors for the risk that inflation will erode the value of their principal. TIPS investors don't take that risk. If inflation rises, their principal increases with it.
Theoretically, the difference in yield between a regular Treasury and a TIPS should equal the expected rate of inflation over the life of the securities. So if inflation's expected to be 2% a year over the next 10 years, the yield on a regular 10-year Treasury should exceed a 10-year TIPS yield by 2 percentage points, or 200 basis points.
TIPS are cheap, then, when the difference in yield between them and regular Treasuries is less than the expected inflation rate. For example, say a regular 10-year Treasury is yielding 4.60% and a 10-year TIPS is yielding 3.80%, a difference of 80 basis points, or 0.8 percentage point. Only if inflation averages less than 0.8% a year over the life of the securities will the regular Treasury investor come out ahead. If inflation exceeds 0.8% a year, the TIPS investor will come out ahead.
Guess what? Those are the approximate yields on the 10-year Treasury and the 10-year TIPS, as of Thursday afternoon. Unless you see inflation as measured by the
consumer price index
dwindling to about half its current rate of 1.5%, TIPS are cheap.
TIPS have generally been nothing but cheap since the Treasury started issuing them a couple of years ago. That's largely because they have yet to gain widespread acceptance by investors. And because the outstanding volume of TIPS is so much smaller than the outstanding volume of marketable Treasuries (about $63 billion, compared with about $3.5 trillion), fewer people own and make markets in them, making them less liquid than regular Treasuries. (Traders joke that TIPS stands for Totally Illiquid Pieces of #$%&!)
"It's not a trading instrument," concedes William Lloyd, head of market strategy at
. But, he adds, "Given that it's tied to inflation, you want to take a longer-term view." If you buy TIPS and hold them to maturity, their relative illiquidity won't matter to you.
If you're going to buy TIPS outside of a tax-deferred account, be aware that, as with zero-coupon bonds, you'll owe tax on the accrued principal each year.
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TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities. Because of size constraints, this compilation has been abridged. Please see the original versions of each Fund Forum topic for the complete text.