Mutual Funds
7 Sure Ways to Bigger Returns
Are your mutual funds suffering from the blahs? It's time to whip them into shape. Start by putting your portfolio on a diet -- by dumping the slackers and asset-bloated funds -- and adding some energetic new replacements.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, September 2005
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3. Slim down your portfolio
Asset bloat isn't a digestive problem. It's what happens when a fund manager tries to wolf down too much of your money. Asset bloat is good for a fund's sponsor because it means more fees. But investors often suffer because a fund that grows too large can lose the edge that helped build its reputation.
Funds that invest in small companies are at greatest risk. For example, Aegis Value, with assets of $709 million, may be too big for a fund that focuses on small, undervalued firms. Manager Scott Barbee gets credit for closing the fund last November, but he may have acted too late to avoid harming its performance. More than half of the fund's money is in cash, a sign that Barbee can't find enough acceptable stocks that are worth buying.
Rather than holding massive cash reserves, most supersize funds buy more stocks -- or stocks of larger companies. Fidelity Low-Priced Stock once invested mainly in small companies. But the market value (share price times the number of shares outstanding) of the $36-billion fund's average stock has jumped almost fourfold, to $2.2 billion, since 1997, according to Morningstar.
Even when a fund invests in big companies, there comes a point when enough is enough. Fidelity Magellan is the poster child for the dangers of asset bloat. Since its assets soared past $100 billion in 1999, the fund has finished above average against other large-company funds only once. With $55 billion in assets today, the fund still struggles to regain its former glory.
4. Take advantage of youth
New funds tend to perform better than old ones. That's because they're small, giving their managers flexibility to load up on their favorite stocks without dramatically affecting the stocks' prices. New funds also don't carry a lot of baggage, such as a manager who is reluctant to sell because of tax consequences.
You don't want to buy just any new fund. New funds that are run by proven managers or that are sponsored by large, reputable companies are your best bet. Fidelity, for example, frequently introduces new funds that jump out of the starting gate. Within the past year, it launched three funds with promise: International Real Estate (FIREX), Small Cap Growth (FCPGX) and Small Cap Value (FCPVX).
Keep an eye out for Wintergreen fund, coming in September. The manager is David Winters, who had an excellent track record at Franklin Mutual Series (see "Dollars for Dimes," Nov. 2004). Another fund with an impressive pedigree due out by year's end is Clipper All Equity. Unlike the established Clipper Fund (CFIMX), which often holds a lot of cash, All Equity will be fully invested in stocks. Other firms debuted intriguing funds in the past year or so. American Century, which employs a skilled team of bargain hunters, launched Mid Cap Value (ACMVX). Michael Corbett, manager of Perritt Micro Cap Opportunities, unveiled Perritt Emerging Opportunities (PREOX). And Primecap Management, which runs Vanguard Primecap, started Primecap Odyssey Aggressive Growth (POAGX), Odyssey Growth (POGRX) and Odyssey Stock (POSKX).
You can identify young funds with a bit of a record by scanning the tables for funds with only one-year results. Among those worth exploring are Baron Fifth Avenue Growth (BFTHX), Buffalo Micro Cap (BUFOX), T. Rowe Price Diversified Mid-Cap Growth (PRDMX) and Wasatch Heritage Growth (WAHGX). For more about these funds, visit their Web sites.