In the next few weeks, "Funds to Buy Now!" stories will start making their annual year-end appearances on magazine covers. But buying now based on those recommendations may not make you happy later.
Take the $3.7 billion
Artisan International fund. Picked last year as best international fund for 2000 by both
magazines, the fund is down almost 15% year to date. That performance compares with the 5% average drop seen by other international hybrid funds so far this year, according to
, and is a far cry from the fund's 81% return last year.
Another case in point: the $4.9 billion
RS Emerging Growth fund, picked as
magazine's top small-cap fund for this year. The fund's aggressive tech investments helped fuel its performance in 1999 to a stellar 183% return, but the rocky tech sector has sent the fund down almost 23% so far this year. The average mid-cap growth fund has lost about 6.3%, according to Morningstar.
Not every mutual fund included on last year's hot lists for 2000 went south. A review of last year's fund picks from personal finance magazines
show mixed performance results. Indeed,
fund portfolios are beating the
so far this year, which is off 9.5%. But the downturns that some funds have taken serve as a cautionary tale to investors lured by the glossy magazine covers promising the next big money-making opportunity.
Magazines can be a great source of ideas, but they shouldn't be taken as the authoritative source -- and not just because a one-year time horizon isn't always the best course to take for a mutual fund. First, their fund selection methodology might not jibe with your goals. Second, the funds they promote tend to get saddled with new assets, often making them harder to manage. And finally, what has been "in" in recent investing history may not be where the action is going forward.
Fund selection methodology varies from publication to publication.
magazine's list for 2000 focuses more on managers who have been able to deliver superior returns in the past, while
list picks funds the magazine thinks will capitalize on the themes expected to dominate business during the next several years, such as technology.
Take a moment to read the methodology, rather than jumping right to the star roster. You might find it doesn't mesh with your goals -- or maybe you'll find it inadequate.
Trend Is Not Always a Friend
As Internet stocks' pathetic performance this year has shown, what has worked for a year or even two or three is not necessarily going to keep working in the near future. So if a magazine selects a fund because of its past gains, that doesn't mean you'll get the same thing next year. The fall of the Internet fund this year is perhaps the best example of that lesson. (Today's
Fund Junkie column shows that of the 182 funds in last year's Century Club, only six are in the black this year.)
"People need to be wary of what may be trendy," warns Russ Kinnel, Morningstar's director of fund analysis. "It's still up to you to monitor these picks, understand why the magazine picked them and why they should be in your portfolio."
Says Percy Bolton, a Los Angeles-based financial planner: "If you pick the top performer now, you have a good chance of having the bottom performer the next year."
So How Can Mag Lists Help?
These lists can serve as a starting point for investors to learn more about funds that can be good long-term holdings, says Kinnel.
"I think you're kind of promising something you can't deliver if you're implying that these are the best picks for a single year," says Kinnel. "It's pretty impossible to predict short-term performance. But to buy them and hold on to them for 10-year funds, they do a respectable job."
Although down this year, the Artisan International fund, for example, boasts a five-star rating from Morningstar, a three-year annualized return of almost 28% and a one-year return of around 6%. So, for an investor undaunted by an off year or two, the fund could be a good long-term bet.
The magazines themselves may also provide some context for investing in general.
intro to its best investments for 2000 presciently warned that sectors that have experienced sharp run-ups like tech could see near-term pullbacks.
magazine also warned investors about the dark side of the bull market -- excessive speculation, lofty
price-to-earnings ratios and worshipping false heroes -- with its 2000 picks.
"Six years ago, it was all 'hot funds to buy now.' That wasn't helpful at all," says Morningstar's Kinnel. "The tone has improved. There are always places where you can get: 'Buy this fund for the next six months.' For the most part, the major magazines are above that."