More than a third of current mutual fund assets are earmarked for re-tirement accounts. But despite the fact that retirement is among most people's important financial goals, no one has figured out which of the more than 7,300 mutual funds available are best suited for retirement needs.
A great fund for the general investor isn't necessarily a great fund for someone who's looking to retire in the next few years. What investors really need is a system tailored to each phase of the retirement process, one which takes into account changes in an individual's financial picture as the years pass.Smart Money magazine recently looked at all 2,230 stock and bond funds with five-year records in Morningstar's database. Applying a proprietary set of criteria, it chose 18 funds - six each in three age categories - that it felt best fit the needs of retirement-oriented investors. Smart Money isn't suggesting you sell all the funds you already own, but rather that new investments be focused in the right areas.
To select its funds, Smart Money began by enlisting the help of mutual fund expert Hrach Alexanian, creater of a unique fund-ranking system called "suitability to task." As its name implies, this system judges funds based on how well they meet certain investing goals.
Alexanian, a former researcher for Morningstar who now works at the Cambridge, Massachusetts market-data firm OneSource Information Services, began with two basic assumptions. The first is that traditional fund categories - growth, equity-income, intermediate bond, global income and so on - are irrelevant. A fund's stated objective is less important, Alexanian argues, than its historical performance patterns.
The second assumption is that standard risk measures, such as beta, can unfairly penalize a fund. They count volatility on the upside as much as on the downside - and who would complain that a fund gains too much?
Alexanian's own risk measurements take into account the effect of income taxes as well as sales charges, when appropriate. His three retirement criteria are capital growth, capital preservation and purchasing-power preservation.
By combining these three criteria in different ways, Smart Money created what it believes are the ideal characteristics for retirement investors at three different stages: when building assets is the primary goal; when building assets shares priority with avoiding losses; and when hanging on to what you have is most important.
Then Smart Money did its own research into the highest-ranked finalists, choosing six funds of each type. They are, for ages 25 to 45: Janus Worldwide, John Hancock Special Equities A, Kaufmann, MFS Emerging Growth B, PBHG Growth, Putnam New Opportunities A; for ages 45 to 55: Babson Value, Fidelity Growth & Income, Homestead Value, Neuberger & Berman Guardian, Strong Opportunity, Third Avenue Value; for ages over 55: Dodge & Cox Balanced, Eaton Vance Short-Term Treasury, Invesco Total Return, T. Rowe Price Capital Appreciation, T. Rowe Price Equity Income, Warburg Pincus Fixed Income.
(Smart Money magazine, 1790 Broadway, New York, NY 10019; monthly; $24 annually.)