Funds for tough economic times

The Baltimore Sun

As fund investors formulate their strategies for a hazy 2008, about the best that can be said is that it looks like a textbook year for diversification.

Growth funds look more promising than value funds, some analysts say, while mid-cap and large-cap funds should have the edge over small-cap funds. Yet experts aren't anticipating they will be making any huge shifts to capitalize on potential good news.

"No one in the marketplace seems to have any conviction whatsoever about 2008 because no one is clear about the U.S. economy's direction or its potential effect on global markets," said David Hollond, co-manager of American Century Heritage Fund.

Mid-cap growth funds provided resilient leadership in 2007, with a 16 percent average return, according to Lipper Inc.

The $3.2 billion mid-cap American Century Heritage Fund rose 35 percent over the past 12 months and has a three-year annualized return of 26 percent. Both results rank in the top 1 percent of mid-cap growth funds. Using a disciplined quantitative approach to find stocks with accelerating earnings and price momentum, the fund trades often but avoided much of the volatility of its peers.

Its top stock holdings are eclectic. They include telecommunications firm NII Holdings Inc., industrial-materials firms Precision Castparts Corp. and BE Aerospace, and Medco Health Solutions Inc.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has a 1 percent annual expense ratio.

Many experts anticipate ups and downs this year.

"I think 2008 is going to be a very volatile year for mutual fund investing because of the subprime crisis and rising inflation," said Mark Salzinger, editor and publisher of The No-Load Fund Investor and The Investor's ETF Report newsletters in Brentwood, Tenn. "Growth funds will likely perform better than value funds, while large-cap funds will do better than small- and mid-cap funds."

Large-cap growth funds hold the stock of big companies with the most exposure to overseas demand and profit potential, which is a definite plus, Salzinger said. The downside is that many of these firms are in technology, which would suffer in a worldwide economic slowdown.

He's fond of health care because it won't be as affected by the economy, and its stock prices haven't been bid up much yet. He recommends the $2.3 billion T. Rowe Price Health Sciences, which has a one-year return of 19 percent and three-year annualized return of 16 percent.

That fund's top holdings include Gilead Sciences Inc., Alexion Pharmaceuticals Inc., CVS Caremark Corp., Genentech Inc. and Cephalon Inc.

A no-load fund, it requires a $2,500 minimum initial investment and has an annual expense ratio of 0.87 percent.

Another Salzinger favorite has foreign holdings, which many experts recommend. The $220 million T. Rowe Price Africa & Middle East Fund, launched in September, has a three-month return of 20 percent.

Top portfolio holdings include Egyptian firms Orascom Construction in industrial materials and EFG-Hermes in financial services, the Commercial Bank of Qatar, Nigeria's United Bank for Africa and South Africa's Aveng Ltd. in consumer services.

It is a no-load fund requiring a $2,500 minimum initial investment (it does not yet have a computable expense ratio).

Some experts are thinking big.

"There is good reason to make sure you have exposure to large-cap funds and growth funds in 2008," said Russel Kinnel, director of mutual fund research for Morningstar Inc. in Chicago. "Small-cap stocks, by most measures, had become more expensive than large caps, and people are waking up to the fact that large caps still have some room to keep going."

In any type of market, it still makes the most sense to stay diversified with a long-term plan that you stick with, Kinnel said. For example, the worrisome ingredients in this year's potent market cocktail include possible recession, oil at $100, the falling dollar and any additional pain left from the subprime mess, he said.

Some large-cap growth funds deserve a closer look from investors, Kinnel said.

One is the $4.4 billion Dreyfus Appreciation Fund, with a one-year return of 3 percent and three-year annualized return of 8 percent. Its low turnover means excellent tax efficiency.

Its top holdings are Exxon Mobil Corp., Altria Group Inc., General Electric Co., Procter & Gamble Co. and Chevron Corp.

This no-load fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.95 percent.

Andrew Leckey writes for Tribune Media Services.

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