Is it time to move into real estate funds?
Q I am a widow, and I try to invest conservatively. I'm invested in stock and bond mutual funds, plus index funds in both categories. I also invest in companies through their dividend reinvestment (DRIP) plans. I have an IRA and a two-year CD. I am now considering investing in Vanguard's REIT Index Fund for further diversification. Are REITs good investments?
V.N., Sylvania, Ohio
A Chicago-based information firm Morningstar Inc. concludes that the Vanguard REIT Index Fund - which tracks a REIT index published by Morgan Stanley & Co. - should continue to do well given the fund's low expense ratio.
REITs invest in residential and or office properties, and funds in this category have been among the top performers of 2001. Measured by total return, REITs are up over 13 percent according to a special index published by Dow Jones.
The Vanguard REIT Index Fund is up about 10 percent, year to date, beating most stock mutual funds, but only in the mid-range for REIT funds.
Q I'm troubled. According to advertising by Janus, the mutual-fund giant, its fund managers spend hours checking out prospective companies to invest in. Supposedly they even go so far as to count fiber cables. Yet, Janus was one of the largest stockholders in Enron, which just went belly up. I know I'm not the only one asking this question, but how does one protect against fund managers who are supposed to spot lemons before they invest in them - with our money?
Name withheld, Boston
A "Look at the process used by the managers to check out companies," says Russel Kinnel, who heads up equity research for Morningstar. "Were the managers gullible about other companies that have had trouble? Do they easily accept claims of yearly growth" without asking for real proof?
Fortunately, most funds, including Janus, invest no more than 5 percent in any one company, so they can contain losses, Mr. Kinnel says.
One way to avoid bad manager decisions, Kinnel says: Look for funds that have low turnover of companies. "That way, managers have more time to check out company assertions. They keep going back to companies for information."
By Guy Halverson
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