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| Kiplinger's Mutual Fund Guide
Understanding the ins and out of mutual funds will help you become a smarter, better investor. Take a look at these stories from the latest Kiplinger's Mutual Funds special issue. A Plan for Achieving Your Goals 8 Virtues of Great Funds Thinking Outside the Box Breaking Up Is Hard to Do Real Simple Investing |
Specialized funds
For several years, Ken Heebner's CGM Focus (CGMFX) rode the real estate boom by owning a parcel of home-building stocks. Then in 2004, he abruptly dumped the homebuilders and charged into energy and industrial-materials stocks. Meanwhile, he sold short -- a way of profiting from a stock's decline -- shares of some big U.S. consumer and telecom companies.
Huge sector bets, short positions, a concentrated portfolio and sudden shifts are hardly new for Heebner, who invests as much by closely following economic developments as he does by analyzing individual stocks.
For most folks, this is no way to manage money. But Heebner, a 30-plus-year industry veteran, seems to have perfected this style. Over the past five years, CGM Focus returned an annualized 26% -- 24 percentage points per year more than the S&P 500. An older Heebner fund, CGM Capital Development, which is shut to new investors, gained 13% annualized over the past 20 years, one point per year ahead of the S&P. But when Heebner is out of step, performance can be awful. For instance, he wouldn't invest in highflying technology stocks in 1998 and 1999 and trailed the market badly.
It's best to view Focus as a hedge fund in the guise of a mutual fund. As such, it shouldn't be the main course on your investment plate -- but in small portions it can do wonders for your portfolio.
If the mutual fund world has a superstar today, it is unquestionably Bill Miller. Under his leadership, Legg Mason Value has topped the S&P 500 for 15 straight years, an unparalleled record of consistency. But since its inception six years ago, we have consistently suggested Legg Mason Opportunity (LMOPX)as the preferred vehicle for riding the Miller bandwagon. It has been the right call: Opportunity's five-year annualized return of 11% beats Value's by seven percentage points per year.
Opportunity is a more attractive choice than Value because it's smaller (assets are less than $4 billion, versus $45 billion for Value and other similarly run accounts) and more flexible. At Opportunity, Miller can invest in smaller companies. The newer fund also allows him to bet against stocks by selling their shares short or by employing options. Opportunity provides more validation for Miller's painstaking research and willingness to buy "mispriced" stocks, regardless of whether they fall into the growth or value camps.
Like Opportunity, T. Rowe Price Real Estate (TRREX) shouldn't represent a major portion of anyone's portfolio. But the fund, which invests primarily in real estate investment trusts, is a nice diversifier. The fund yields about 3.2%, and its price movements don't correlate closely with the overall stock market. It returned an annualized 22% over the past five years and has lagged the average real estate fund just once in its eight years of existence.
Manager David Lee runs the fund conservatively. He invests the bulk of assets in a "core, blue-chip group" of REITs that are well diversified both by geography and by property type. He then adds a few more-speculative stocks. In either case, he tries to identify companies with superior management teams.
Bond funds
For more than two decades, the best way to invest in bonds was to buy long-term issues. This held true even as the Federal Reserve relentlessly raised short-term rates. But we don't recommend owning long-term bond funds now because the potential returns are not worth the risks (bond prices move inversely with yields, and long-term bonds are more volatile than short-term bonds).
From today's meager levels, rates are more likely to climb than to fall. When that happens, the prices of most bonds and bond funds will sink. What to do? Invest some of your bond money in Fidelity Floating Rate High Income (FFRHX), a fund designed to benefit from rising short-term rates.
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