You take the bad with the good when investing in stock mutual funds.
The bad is a lingering scandal about fund companies favoring fat-cat clients over average Joes in their trading practices.
The good comes in the form of outstanding recent returns that threaten to turn average Joes into fat cats themselves.
Since the average stock fund was up 35 percent in 2003, the best annual gain since 1967, investors are starting to have good feelings about funds again. They're avoiding fund families that made it onto the government regulators' police blotter, but also putting the trauma of the tech bust and bear market behind them.
No one can get too cocky, since stock funds suffered an average decline of 20 percent in 2002, their third worst return ever. And while the U.S. economy is reviving, market predictions haven't been all that accurate.
Yet it does seem that a basic logic to stock selection that had been missing in action for several years has returned. Such logic helped Apex Mid Cap Growth Fund turn in the best performance of 2003, a 165.28 percent gain.
"I'm doing something old-fashioned — picking great stocks — and I held onto these winners even when they went down four or five points in a day," explained Suresh Bhirud, portfolio manager for Apex Mid Cap Growth. "Since we were coming out of the worst bear market since 1929, I figured we'd have a fantastic rally in 2003."
Bhirud looks for future revenue growth in "exciting" mid-cap companies. With returns from risk-free investments now at about 1 percent, he reasons that investors will find their best opportunities in stocks.
His top holdings in 2003 were Netflix Inc. (NFLX), an online entertainment subscription service he bought at $10 a share and saw go over $60; Sonus Networks Inc. (SONS), a provider of voice services switching equipment he purchased at 44 cents a share that reached $9; and RedHat Inc. (RHAT), a provider of an enterprise-operating platform whose shares he bought at $6 a share and rose above $20.
Technology funds led the way last year, followed by China-based, gold and small-cap funds, according to Lipper Analytical Services.
"Businesses had stopped their capital spending, but it's been picking up the last few months and that's a positive for technology," said Fritz Reynolds, portfolio manager of the Reynolds Fund, up 121.94 percent for the year. "People had been worried about Iraq and terrorism, but they've shifted focus to individual company fundamentals, which are quite good."
Reynolds expects 2004 to be a good year for the market, though not as good as 2003. He believes an economy running 4 to 4.5 percent growth creates an environment best for quality growth stocks.
His portfolio of 250 stock names benefited most from semiconductor firms Intel Corp. (INTC), Texas Instruments Inc. (TXN) and Altera Corp. (ALTR); software companies Siebel Systems (SEBL) and Veritas Software (VRTX); the Internet firm Ask Jeeves Inc. (ASKJ); and biotech companies Genentech Inc. (DNA) and Amgen (AMGN).
- The top stock mutual funds for the full year 2003, according to Lipper, were:
Apex Mid Cap Growth (BMCGX), Stamford, Conn.; $1.4 million in assets; 5.75 percent load (sales charge); $1,000 minimum; 1-877-593-8637; up 165.28 percent.
ProFunds Ultra Semiconductor (SMPIX), Bethesda, Md.; $64 million; no load; $5,000 minimum; 1-888-776-3637; up 146.56 percent.
ProFunds Ultra Internet (INPIX); Bethesda, Md.; $36 million; see above fund; up 128.91 percent.
"Gold performed very well due to a falling dollar, which we believe will probably decline further in 2004," said Frank Holmes, chief investment officer for U.S. Global Investors World Precious Metals and U.S. Global Investors Global Resources, up 42.58 percent and 35.85 percent, respectively, in the fourth quarter. "There's an inverse correlation between a falling dollar and gold, which is now over $400 an ounce."
Don't buy gold if you want to get rich, Holmes cautioned, but do consider a 5 to 10 percent weighting in your personal portfolio as investment insurance that will benefit from a falling dollar. His biggest winner was precious metals producer Wheaton River Minerals Ltd. (WHT), up 138 percent.
Besides the success of gold in the fourth quarter, stocks of India benefited from offshore U.S. jobs and that country's productive economy.
- Top-performing stock funds in the fourth quarter of 2003 were:
Eaton Vance Greater India "A" (ETGIX), Boston; $18 million; 5.75 percent load; $1,000 minimum; 1-800-225-6265; up 43.38 percent.
U.S. Global Investors World Precious Minerals (UNWPX), San Antonio; $321 million; no-load; $5,000 minimum; 1-800-873-8637; up 42.58 percent.
U.S. Global Investors Global Resources (PSPF), San Antonio; $128 million; see above fund; up 35.85 percent.
Effects of the fund-trading scandal, perhaps more psychological than monetary, will be felt for a while.
"The scandal was distasteful, and investors reacted negatively, with some funds named by regulators having significant net redemptions," said Don Cassidy, senior research analyst with Lipper in Denver. "If it really bothers you, and unless you have a huge tax problem with selling, you should go down the street to some of the fund families everyone thinks are clean, such as Fidelity, Vanguard, American Funds and T. Rowe Price."
Cassidy expects a 10 to 15 percent increase in stock fund value during 2004, not up to 2003's standard, but still definitely good.
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at firstname.lastname@example.org.