Brenda Buttner Chats on AOL, Dec. 2

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Brenda Buttner chatted on AOL MarketTalk Thursday, Dec. 2. AOL's MarketTalk is hosted by Sage Online (Keyword: PF Live). As with all chats, this transcript is unedited.

Comment:

Live from New York, N.Y., please welcome Brenda Buttner, senior columnist at TheStreet.com. Brenda can answer your questions about mutual fund investing.

BrendaButtner:

Welcome, everybody. Thanks for coming. I'm happy to answer any questions you might have about mutual funds.

Question:

Is it a good tax strategy to sell a fund with a loss and purchase a similar fund if you believe in that sector or style, like with REIT funds?

BrendaButtner:

That depends. Unfortunately, that's the answer that you have to give to a lot of that fund investing. That strategy can make sense if you do sell a loss. You have to make sure the fund really is a loser, that is that it's performing poorly against its peers. Almost all REIT funds have had a tough time. Make sure that you're not considering a bad sector or bad funds.

Question:

Do you anticipate that we will see more fund companies offering online account opening, etc., like Invesco now has on their Web site?

BrendaButtner:

I certainly hope so! Online investing and distribution of portfolio material will hopefully mean lower expenses for us, the shareholders, even though we haven't seen the benefits of that kind of online investing yet.

Question:

Has your research indicated that money managers have better advantages for beating the indexes when it comes to small and international funds vs. large cap funds?

BrendaButtner:

Yes. Very good point. Any area that requires more research will provide an advantage to active managers. Although I do believe in indexing as well for large-cap portfolios.

Question:

The average alpha for growth funds is a negative 5, suggesting that most fund managers detract more than they add. Is the pool of good managers that thin?

BrendaButtner:

If you look at how many have been beating the benchmarks the past 10 years it would certainly seem that way. I think there's room for both index and active managers in your portfolio. The trick is finding the right actively managed fund. Right from the start, they have the disadvantage of a huge drag of expenses on their return, which makes it tougher for them.

Question:

Where do you come down on the load vs. no-load debate?

BrendaButtner:

Again, I think there's room for both in your portfolio if they're GOOD funds. I think the debate is not so much load vs. load, but high fee vs. low fee. All too often, we look at the load and forget to look at the expense ratio which can really take a big bite out of the bottom line.

Question:

I heard Janus is coming out with a value fund. Do you have any comment on it?

BrendaButtner:

Janus has a terrific stable of managers and a proven record. But before jumping into this one, I would wait a bit to see if it is indeed a value fund and not just a growth fund with a value close.

Question:

What has been the catalyst for the underperformance of small-cap value funds this past year?

BrendaButtner:

The catalyst has been the underperformance of small cap value stocks. This market has been led by the sexy large cap tech stocks and everybody's piling money into them. That does not mean that the tide won't shift because there are plenty of good companies among the small cap cheaper sector. Knowing when that happens is almost impossible which is why it pays to be diversified.

Question:

WHAT IS A GOOD MUTUAL FUND WITH A LOW-INVESTMENT BUY IN?

BrendaButtner:

Most of the index funds have low minimum investments. You might also take a look at the Stein-Roe Young Investors fund which offers low minimums in order to entice parents with young children to start investing. But many funds will cut their minimums if you invest regularly on a monthly basis. So be sure to ask about automatic withdrawal programs when you find a fund that makes sense for you.

Question:

Saw the headline in your column about Dodge & Cox's turnaround -- how, as value investors, did they pull off such a dramatic comeback?

BrendaButtner:

They were making a comeback against their peers, so it is a bit relative. But they made some smart moves in stocks such as Motorola and come on during tough times. Unlike many value funds, they stick to a very disciplined strategy, so their portfolio last year is almost identical to the one this year, but the market turned around on some of their stocks giving them a boost.

Question:

It seems that many mutual funds have so many holdings that it's hard to get a good "pop" when a stock move to the upside. Are concentrated funds a better way to do this, assuming you can stand the hits on the downside?

BrendaButtner:

Very good question. Concentrated funds put a managers best ideas forward. They can be much riskier than diversified funds. Two excellent concentrated funds would be Marfico Focus and White Oak. (The latter one I own.) They have proven records.

Question:

In your experience, have you found it useful, or even accurate, to chart mutual funds -- or are they not suited for this type of analysis based on their composition?

BrendaButtner:

I have had a very lively debate about this topic with some technical analysts. I strongly believe that charting mutual funds does not give an investor much advantage. The basic fundamental research: checking out a manager's strategy, long term record, expense ratios and turnover, may be much more boring to do but also much more useful.

Question:

In its simplest form, can an investor achieve proper diversification by holding three index funds -- large cap domestic, small cap domestic and an international?

BrendaButtner:

Yes, if you're talking about equity. Remember you've ruled out bonds from this equation. But if you believe in indexing (and I do) that is a simple way to put together a well diversified portfolio.

Question:

Is the Russell 2000 a mid-cap index and is this a useful index holding for a mutual fund investor?

BrendaButtner:

I would tend to think of it as a small cap benchmark. It is a fine way to capture that end of the market through an index fund.

Question:

What is the rationale for a fund company with a closed fund to continue to charge 12b-1 fees if it isn't marketing the fund anymore?

BrendaButtner:

You've struck one of my biggest nerves! There is no rationale. This is an egregious abuse of fees. The point of a 12b1 fee is to pay for marketing so that the fund can get bigger and, theoretically, shareholders can enjoy the benefits of economies of scale. When a fund is closed, you can't get new investors, so it just seems a way of fund companies to collect more fees at the expense of existing shareholders.

Question:

What interesting trends do you see unfolding in the fund industry over the next few years?

BrendaButtner:

The growth of online investing is one I'm watching closely. On the negative side, I'm also watching the growth of closet indexing. That is active funds that essentially mirror an index but then charge higher fees than an index fund. A lot of large-cap growth funds are falling into that category and investors need to carefully monitor the portfolios of their funds to know exactly what they're getting.

Question:

Which sector funds are some of the more successful ones in your opinion?

BrendaButtner:

Clearly, technology funds have been the big winners in the last few years. I prefer to invest in a tech fund that is a bit broader than some of the narrow Internet funds. Managers such as Kevin Landis of First Hand Funds do a good job of recognizing broad trends within the larger industry and playing those large-cap leaders and small-cap innovators.

Question:

What do you make of the changes in the Lipper mutual fund categories? Has this simply created more confusion for the average fund investor?

BrendaButtner:

Many changes seem to create confusion for us! But I think the Lipper categories are a step in the right direction. They used to be so broad as to be almost meaningless. But now, by looking at both stock size and manager strategy in a fund, they provide a better yard stick. Be careful, however, not to be so married to filling in all the different boxes of the Lipper and Morningstar rating charts. Sometimes, managers need more flexibility than to be pigeonholed into one cap size or investing philosophy.

Question:

In what case does it make sense to purchase a fund with a back-end load?

BrendaButtner:

If you know, you'll be keeping that fund for a long time. Many back-end loads get smaller the longer you hold the fund. And you can sometimes get lower expense rations through out the duration. In the end, it can be a wise investment for a long-term investor.

Comment:

Thank you for joining us today, Brenda!

BrendaButtner:

Thank you everybody. Fantastic questions!