It's easy to criticize the investment industry for all its shortcomings -- scandals, high fees, lousy performance. But on the plus side: The industry gives you a thousand different ways to make bets on the market. Specialized mutual funds and exchange-traded funds slice up the market into little pieces, allowing investors to make specific bets on areas they think will do well. When properly employed, these offerings can serve as solid diversifiers in a well-balanced portfolio -- and give investors the opportunity to try to outperform the broader market. With that in mind, let's take a quick look at a few arenas that are poised to do well in 2004, and highlight some solid mutual fund and ETF offerings that enable you to ride the trends. But keep in mind: Sector and regional bets can be highly volatile and are best made in small doses, say 5% to 10%.
Back in June, I wrote a column suggesting that it was finally time to consider investing in Japan after more than a decade of devastating declines. And the Nikkei 225 returned 24.5% for the year. While 2004 may not be quite as robust, plenty of big-cap Japanese multinationals such as Sony ( SNE) and Honda ( HMC) still look cheap relative to U.S. peers. Meanwhile, according to some experts, small-cap Japan looks even better. Investors looking for good Japan funds have a few excellent options. As far as actively managed mutual funds go, my two favorites are the ( MJFOX) Matthews Japan fund and the ( FJSCX) Fidelity Japan Small Companies fund. The Matthews Japan fund, which sports a 2% expense ratio (below the category's 2.28 average), makes bets of all sizes in Japan, and its 9.17% average annual return over the past five years tops 87% of its Japan fund peers. Investors looking to make a bet on Japanese small-caps would be hard-pressed to find a better option than the Fidelity offering, which ranks in the top 1% of all Japan funds over a one-, three- and five-year period. Kenichi Mizushita manages the fund, which sports a slim (for the category) 1.19 expense ratio. For the ETF proponents, the iShares MSCI Japan Index fund ( EWJ) is an ETF that tracks the portfolio of the MSCI Japan Index. The strongest selling point of the fund is its low expense ratio of 0.84%, but the 38.7% return in 2003 is a ringing endorsement as well.
Investing in the health care sector has long been a great way to diversify your portfolio -- and give it a little extra sizzle on the returns side. Given the sector trailed a bit in 2003 despite strong earnings performance, this year might be a good time to take a little extra helping of health care in the form of a sector of an ETF bet. On the mutual fund side, once again we have several great picks. The two standouts, in my opinion, are the ( VGHCX) Vanguard Healthcare fund and the ( ETHSX) Eaton Vance Worldwide Health Sciences fund. Both funds are run by long-tenured pros who have notched terrific returns, but they have slightly different approaches to the sector. The Vanguard Healthcare fund has been superbly managed since 1984 by Ed Owens, who has turned in an outstanding 20.16% average annual return over 10 years. Owens puts a global spin on the sector and diversifies broadly within the category to smooth out performance. At the load Eaton Vance fund, longtime skipper Sam Isaly inclines toward more volatile biotech fare, with impressive results: The 10-year average annual return is 17.34%. On the ETF side, the Health Care Select Sector SPDR ( XLV) offers a cheap way to play the biggest U.S. names in the sector at a cheap price -- a 0.28% expense ratio. The SPDR, a basket of health care companies in the S&P 500, is a bit Big Pharma heavy -- Pfizer ( PFE), Johnson & Johnson ( JNJ) and Merck ( MRK) comprise nearly 40% of the fund.
I don't want to sound like a broken record, but good advice bears repeating: The energy sector looks undervalued and desirable for 2004 and beyond. Click here for a full explanation of why energy might be poised to rally this year. For readers looking to cut to the chase, here are a few good bets for the sector.
Among mutual funds, three great offerings are the ( VGENX) Vanguard Energy fund, the ( PNRZX) Jennison Natural Resources fund and the ( PRNEX) T. Rowe Price New Era fund. There are two solid ETF picks as well: The Energy Select Sector SPDR ( XLE) is the cheapest offering with a 0.27% expense ratio, and the iShares S&P Global Energy Sector Index Fund ( IXC) costs a bit more (0.65%) but offers global diversification.
The nation that straddles East and West literally and figuratively has been a great performer in the past year, and may continue to blossom as the secular Islamic nation moves closer to entry in to the European Union. In a recent Fortune magazine, the stellar Julius Baer International Equity manager, Rudolph-Riad Younes, suggested the Turkish Investment Fund ( TKF), a Turkey-focused closed-end fund that trades on the Big Board under the symbol TKF, as a top pick for 2004. The fund soared 167% in 2003, and may have room to grow even more. Of course, it's a bet that carries risk, so investors should tread carefully.