Finding Family Values During Volatile Times
Volatility has become the name of the game on Wall Street.
With the stock market generating wild price swings, the idea that investors can just crank dollars into a mutual fund and make money ran into a buzz saw.
This is the time to be selective and careful, and the big mutual-fund families can offer a variety of choices to tailor a portfolio.
Want a fund that invests in big, high- quality companies, or perhaps a fund that rides the rocket of high-tech companies? Maybe you think it's time to jump into Asian stocks or those of small companies.
The idea behind fund families, from mammoth Fidelity to the smaller Janus, is to give investors choice without leaving home.
If you want to switch out of a blue-chip fund and into an international fund, you just pick up the phone or log onto the fund family's Web site, and the money gets transferred within two trading days.
No need to sell your shares in one fund, wait for the check to come in the mail, then send it into another fund. It's a simple way to follow the first three rules of investing: diversify, diversify, diversify.
But you should choose your family ties carefully. And bigger does not necessarily mean better.
The smaller Janus and MFS Group, for example, beat out mighty Fidelity and Vanguard with the solid returns on their domestic equity funds during the second quarter, ending June 30.
"It's important that you not only diversify in the type of funds you own, but try to buy into the best funds" to achieve highest returns, says Tim Schlindwein of Schlindwein Associates, a Chicago investment advisory firm specializing in funds.
Fine tuning became especially important last quarter, both for individual investors and fund families themselves.
In their pursuit of strategic gain, scores of fund companies merged or formed new alliances.
The investment banking side of Robertson-Stephens family of funds, for example, which had been owned for only eight months by BankAmerica, was sold to BankBoston. But the fund company will stay with BankAmerica.
AIM, which merged with Invesco last year, but operates independently, bought G.T Global, another fund group.
Franklin-Templeton, previously listed on the Standard & Poor's MidCap index, moved up a notch in wealth and is now listed on the S&P 500 Index. That's important, because it means that more investors will want to invest in the parent company, Franklin Resources, says Larry Solomon, head of investment research for The No-Load-Fund-Investor, a newsletter published in New York.
"The quarter was just very active for the fund families," says Mr. Solomon.
Among the major developments:
* More fund groups continued to add index funds, including industry leaders Vanguard and Fidelity.
Moreover, many large funds often behaved like index funds, as fund officials sought to mimic a specific index. "If you can't beat an index, and few funds do, then at least join them," says one analyst.
* Scores of additional funds were created, particularly sector funds such as health-care or biotechnology funds, real-estate funds, and "focus" funds, which specialize in just a small number of stocks, such as 20 companies.
* Some fund companies started or upgraded their fund "supermarkets" - online trading companies that offer a variety of funds from their own and other fund companies. Both Scudder and American Century, just added "fund supermarkets."
* Most fund families struggled "with their largest, biggest funds" during the quarter, says Russ Kinnel, associate editor of Morningstar Inc., Chicago.
Usually, the more money in a fund, the harder it is to be flexible and innovative.
Consequently, more companies are willing to close large funds, Mr. Kinnel says. Fidelity, for example, shut the door to new investors on its huge Magellan Fund.
Fund families are also trying to do a better job of sticking to the stated investment style of a fund, Kinnel says. In some cases, the style used by a fund and the style stated in a prospectus do not match. A utilities fund for example, might actually invest in telecommunications companies.
Here's a quick summary on the 10 largest fund families in the United States, based on Morningstar's classification.
They are ranked below by asset size - the amount of investors' money under management - but note, also, that the box above ranks fund families by their success in US stock markets. So the rankings differ.
1. Fidelity (800-544-8888) of Boston. The industry leader in assets ($470 billion) and total funds (some 260 funds for the public). Fidelity's Magellan fund is the largest in the US. But industry insiders expect No. 2, Vanguard 500 Index, to pass Magellan in the next year or so.
2. Vanguard (800-662-2739) of Valley Forge, Pa.. It specializes in low-cost index funds. The Vanguard S&P 500 Index fund is considered the top index fund.
3. American Funds (800-421-4120) of Los Angeles. It runs some of the biggest US funds: the Investment Company of America Fund and Washington Mutual Fund.
4. Franklin Group (800-342-5236). This California company runs blockbuster bond and international funds, the latter as Templeton funds. Move fast to get its low-entry costs, $100. The minimum investment jumps next month to $1,000
5. Putnam Investments (800-225-1581) of Boston. Its performance numbers are consistently good.
6. T. Rowe Price (800-541-8803). This Baltimore company attracts younger investors through a low-cost investment plan and offers excellent international funds.
7. American Express Group (800-328-8300). Once called IDS, this family gets high marks for solid research.
8. AIM Family (800-347-1919). It has been taken over by Invesco, a British fund group with US operations out of Denver.
9. Oppenheimer Funds (800-525-7048). In part owned by insurance firm Massachusetts Mutual but operated out of Denver, this is a conservative group with solid research work, experts say.
10. American Century (800-345-2021). This Kansas City family offers a wide assortment of funds, including well-regarded gift plans.
Fund Families Pros and Cons
Bigger is not always better when you pick a fund family. Below are a few of the advantages and disadvantages of investing in larger fund families.
* Usually, the larger the fund family, the more funds - and types of funds - are offered. This allows an investor to achieve greater diversity.
* Investing with a fund family allows you to shift assets between different types of funds as market conditions change. Accounts that are not tax-deferred could incur significant tax liabilities, however.
* Larger fund families tend to have bigger, more varied, research staffs whose job it is to come up with good stock picks.
* Some larger fund families, such as Fidelity, offer fund "supermarkets," through which you can buy funds from other mutual fund families.
* The bigger the fund family, the more conservative or cautious it may become in its investment approach. Fund managers don't want to lose market position or customers. And the bigger the fund, the harder it is to achieve sterling performance results
* Some of the best-performing and most interesting funds over time have been single funds, or companies with only one or two funds. For example, the Kaufmann fund, Pax World Fund, and Muhlenkamp fund.
* Smaller fund families sometimes provide more personalized service.