Brenda Buttner Chats on AOL

Among the items discussed, she took a look at Vanguard funds and Magellan's performance.
Author:
Publish date:

Sage Lion:

Sage is pleased to welcome Ms.

Brenda Buttner

, contributing editor for

TheStreet.com

.

TSCBrenda:

Hi, everyone! It's great to be here. Thanks for stopping by!

Sage Lion:

Is there a rule of thumb for whether to purchase load or no-load funds?

TSCBrenda:

It really depends on how much time you want to spend in research. I never rule out load funds as some people do -- if you need an adviser, then it can make sense. But remember that a hefty load can mean a big bite out of your returns. Yet don't forget that no-load funds often carry high expenses that can be just as devastating to your bottom line.

Question:

According to history, aren't my odds better with an index fund vs. a managed fund?

TSCBrenda:

I think it is worrisome that

Microsoft

(MSFT) - Get Report

is taking them on so seriously.

Bill Gates

can spend a lot of money for a long time without hurting his company.

TSCBrenda:

Your odds certainly have been better in the last few years with an index fund. In part, that's because the market has been so narrowly focused on large-caps. Active managers have started to do a bit better of late. The main advantage index funds have over active ones is low expenses.

Question:

Why would

Bill Gates

be trying to put

AOL

(AOL)

out of business? Doesn't he have enough?

TSCBrenda:

LOL! You'd think so. But this is the next frontier, and Microsoft has to prove they can command the Net as they have software. AOL is a formidable challenger on that score!

SageBrian:

Brenda: Isn't that like saying that the biggest difference between the folks in this room and Bill Gates is that he has more money? In mutual funds, expenses are a tremendous factor. Not just an aside?

TSCBrenda:

Brian, a lot more money! But he got it with ruthless discipline. To be number one. He has proven that he can take on most competitors and crush them. Hard to bet against him.

SageBrian:

I agree.

Question:

Brenda, do you see a rally in the health-care sector funds anytime soon?

TSCBrenda:

Health care is a very interesting, interesting option these days. I just spoke with

Garrett Van Wagoner

, manager of five of the top-performing mutual funds around. He has cut down exposure to the Internet and increased his bets on health-care-related stocks. He's a great stockpicker, so it's definitely a sector to watch.

Question:

Brenda: Do you like

(JAGTX) - Get Report

Janus Global Technologyas major part of a long-term SEP IRA?

TSCBrenda:

It's good that you are considering this for a tax-deferred account. Many of the tech funds have high turnover, and tax consequences so they work best in IRAs and the like.

Question:

Brenda, speaking of the Net funds, do you have an opinion as per their future?

TSCBrenda:

I think Net funds can have a place in a very aggressive part of your portfolio. But you have to remember that they will go down as well as up.

TSCBrenda:

I think we tended to forget that in the past year and are learning the hard way now. I would wait a while with the

(WWWFX) - Get Report

Internet Fund to see if the new manager can handle it as

Ryan Jacob

did. Many of the Net funds are part of small families with benches that aren't very deep.

Question

Brenda, do you think

(JAVLX)

Janus 20 might be too aggressive of a fund now that a correction seems to be imminent?

TSCBrenda:

Very good point. But this has been an aggressive fund all along. It just hasn't seemed that way because it was so loaded with big-cap growth stocks during their long rally. If you still like that sector, hang on. It will come back. You shouldn't try to time the market.

TSCBrenda:

Janus is a great fund family and the fund has a terrific manager, but is concentrated and will be very volatile. And remember, contrary to what you might be let to believe by its returns over the last few years, Janus 20 will not go up, only!

Question:

Pardon my ignorance, but how does a 12b-1 fee work?

TSCBrenda:

You are smart to ask about these! They don't make a lot of sense, in my opinion. Essentially, funds tack on a fee that is paid by you, the investor, for "Marketing and Distribution." That means if they want to be distributed by a supermarket, (who charges them) -- they can

pass the fee on to you. There is really not much benefit to the shareholder. Fund companies say that the fees will help attract assets and that expenses will come down as the fund grows, but that rarely happens. And why should you pay for making your fund larger when that is often a hindrance to performance?

Question:

Brenda: Is

(LMVTX) - Get Report

Legg Mason Value Trust efficient enough to have major holdings outside of IRA?

TSCBrenda:

Legg Mason

is , bottom line, a terrific fund.

Bill Miller

is one of the finest managers around, and one of the very few able to beat the market consistently. In a tax-deferred account or not, this is a very good long-term holding.

Question:

If I look at the management fee and add it to the 12b-1 fee and it looks OK, will that work?

TSCBrenda:

Good question. You can't view that number in isolation -- look at the overall expense ratio and then compare it to similar funds. Just as a rule of thumb, the average expense ratio for diversified U.S. funds is about 1.44%. It's more for small-cap and international funds. So if your fund has a much higher expense ratio than its peers, you better be getting something for the extra you're paying.

Question:

Which funds are managed by Garrett Van Wagoner?

TSCBrenda:

He has a small fund family of five funds -- all preceded by his last name, Van Wagoner.

(VWMDX)

Mid-Cap,

(VWEGX)

Emerging Growth,

(VWTKX)

Technology,

(VWPVX)

Post-Venture and

(VWMCX) - Get Report

Micro-Cap. They are very, very, aggressive and volatile. He's been at the top of the charts as he is now. And also at the very bottom. Again, reserve them for money you can afford to lose.

Question:

What are your favorite loaded funds

TSCBrenda:

I like the

Mutual Series

funds. Their legendary manager,

Michael Price

, left about a half year ago, but the new managers have been doing his stock picking for years now, and actually performance has improved since they've taken over. They are strict value investors so know that often in growth markets, they can get hammered, but for a long-term has improved since they've taken over. They are investors, so know that often in growth markets, they can get hammered, but for a long-term holding, they're tough to beat.

Sage Lion:

Do you have an opinion on

(VEXMX) - Get Report

Vanguard Extended Market fund?

TSCBrenda:

Galaxy, I put my money where my mouth is on that one. I invest in the

(VTSMX) - Get Report

Total Stock Market fund. It's an index fund. That invests not only in large-cap stocks but has small-cap exposure too. Very good choice if you can only choose one fund!

Sage Lion:

Are sector funds riskier than diversified equity funds?

TSCBrenda:

Yes, they certainly are. Because they focus on a small segment of the market, they can be much more volatile. You win if that sector is doing well, but if it's not diversification ultimately lowers risk -- that is the bottom line, because you're spreading your bets among a variety of sectors.

Question:

What index fund do you recommend?

TSCBrenda:

For index funds, I prefer to go with the Vanguard family. They essentially invented the index fund as we know it -- and place a very strong emphasis on low costs. Hard to lose with any of their index offerings.

Sage Lion:

What are some of the better regional bank funds available to investors?

TSCBrenda:

I like the

(FBRFX)

FBR Financial Services fund run by

David Ellison

. He's one of the best in the business in financial services stock-picking.

TSCBrenda:

Can I ask all of you a question? Have you been taking money from your mutual funds and investing in individual stock? That's a trend we've been seeing, and I wonder if it will continue through the small-cap correction.

Question:

Would it be wise to move from

(VWNFX) - Get Report

Vanguard Windsor II to one of the index funds now?

TSCBrenda:

Very interesting question. Windsor has been having some problems recently. I think you should use index funds as your core portfolio and then add a few active managers on the outer edges.

Question:

Brenda: What is your opinion on international investment now? What percent?

TSCBrenda:

I think there is always room for international expose in your portfolio -- say 10-20%. I don't discriminate in my portfolio --Good returns, whether born in the USA or not, are what I want!

Question:

Brenda, do you feel we will see much in the way of consolidation in the mutual fund arena?

TSCBrenda:

Yes, you have hit on a major trend in the industry. Smaller fund firms can't afford to compete with the big guys for long.

Question:

Brenda, how do you feel about most of the Vanguards?

TSCBrenda:

I am a big fan of the Vanguard fund family. Low expenses are the name of their game, and remember that though you can't predict performance, you can know how much you pay for a fund. It's one of the few things in the investor's control.

Question:

How does consolidation affect the small investor like us?

TSCBrenda:

Well, it can be a positive. The larger a fund firm, often the bigger it's research team and resources. More analysts and a deeper bench.

Question:

Why would an investor own a bond fund over an individual bond?

TSCBrenda:

For the same reason you buy any mutual fund: Diversification and professional management. You can own a number of bonds when buying a bond fund and rely on the manager to choose.

Question:

Brenda: Since the market is going crazy should we stay in the market or stay in cash?

TSCBrenda:

Well, if you can answer the question about what the market will do, you've got the better crystal ball than the experts! The key here is not to conjecture about what the market will do, but to keep a long-term time horizon and breathe deeply during some of this turmoil. Markets do go down. That's what they're supposed to do occasionally. Staying in cash can have a high opportunity cost.

Question:

What about getting into funds midyear and tax consequences?

TSCBrenda:

Great question. This is something you really need to think about closer to the end of the year because often funds will distribute their capital gains, which means you pay taxes on them, and if you just got into the fund, you're paying for the returns you didn't enjoy. So always call the fund company before you invest and ask when they'll distribute their capital gains.

Quesiton:

Has there been a correction in the market?

TSCBrenda:

Yes, there has been a correction in the

Nasdaq

market. Basically that means that the market lost about 10% or more of its value. But many of the hardest-hit sectors did come back late today. Many of the imploding Net stocks showed signs of life. I think it's important during these times especially to remember why you're investing and what your time horizon is. If you're saving for a retirement that's 10-20 years away, these temporary blips in the market will have little impact.

Question:

Do you think mutual fund investing will become popular in Europe?

TSCBrenda:

Yes, I do. I think they are on the verge of an incredibly powerful trend that we have enjoyed for the past few years. Small investors have to start paying for their own retirements and are discovering there, as we have known for some time here, that the market is a good way to fund that. This will provide liquidity to the markets there and help fuel a turnaround that could be helped by the restructuring in companies we're already seeing there.

Question:

Brenda: What do you think of the

Morningstar

system? Too much fine tuning?

TSCBrenda:

I am a big fan of Morningstar. I use them everyday for my own research. The data is incredible, but it's important you look at what's behind the star ratings. They are just the beginning of your research, not the end.

Question:

Brenda I can get into

(FMAGX) - Get Report

Magellan through my 401(k). OK to buy or is it too high?

TSCBrenda:

Magellan has really turned around. As I like to say,

Bob Stanksy

, its manager, has proven he knows how to dance with a hippo! Meaning that Magellan is huge-- over $100 billion in assets. Generally, the bigger the fund, the higher its market impact costs.

Sage Lion:

Thank you for visiting with us tonight Ms. Buttner. Any parting shots?

TSCBrenda:

Thank you so much for dropping by, this has been lots of fun.

Sage Lion:

Thank you all for a great chat tonight. Happy investing to you all.