Even amid all the market turmoil, 2007 is shaping up as a decent year for mutual fund investors. International stock funds are up 8.3 percent, and US stock funds are up 4.6 percent.
The chief reason, say financial planners and investment officers, is that global worries about credit drying up so far have had the largest impact on areas such as bank shares and real estate - leaving many stock, bond, and international funds to rise along with broad market indexes this year.
As a result, many financial planners say frequent whipsaw days on Wall Street this month haven’t changed their usual recommendation to construct a diversified portfolio and stick with it.
“We don’t do anything defensively when the market’s like this, even when clients call kind of panicked,” said Cheryl Costa, principal adviser at Family Financial Architects in Natick.
She said it is more important for investors to construct a diversified portfolio to begin with, she said, so that “when one part of the portfolio zigs, the other zags.”
Advisers caution that fund returns in 2007 so far are lower than in previous years, however, mirroring slower growth in the overall markets. US stock funds returned 13 percent in 2006 and 2004, and 8 percent in 2005, according data from Morningstar Inc. in Chicago.
Some advisers have been urging clients to expect slower growth for months. In Norwood, Chuck Bean of investment adviser Heritage Financial Services says he’s been moving clients into funds whose prospectuses allow them to invest both in large and small companies such as the Fairholme Fund in Florida, up 9 percent so far this year, or the Kinetics Paradigm fund in New York, up 8 percent.
“Looking at the fundamentals with regard to the valuation of stocks, at the very least we were overdue for a correction,” Bean said.
Generally, advisers suggest people invest in a mix of domestic and foreign companies, and bonds issued both by government entities and corporations. The proportions should depend on an individuals’ willingness to accept risk: Investments that historically have generated the highest returns also tend to move up or down sharply over short periods, while lower-paying investments, like bonds, tend not to be so volatile.
That’s the story that’s played out so far this year, driven by growth in the indexes like the Dow Jones industrials. It closed at 13,238.73 yesterday, off its high on July 19 of 14,000.41, but still up 6.2 percent so far in 2007. It’s relatively simple to see which stocks face volatility based on their exposure to credit and lending issues, said Barry Glassman, senior vice president of Cassaday & Co., a financial planning firm in Virginia.
For instance, real estate funds are down 9 percent for the year because many real estate company fortunes are tied closely to credit markets, he noted. Similarly, what Morningstar calls “small value” funds, those that invest in small companies with relatively little risk, have lost 0.47 percent of their value this year, much of that in the past month.
These small companies tend to have few assets to pledge as collateral when they borrow money, making it more expensive for them to obtain bank loans or otherwise tap the credit markets. The principle doesn’t apply to larger companies, however, he said, which is why funds that invest in larger companies have done relatively better.
“Google isn’t impacted so much by the homeowners in Fargo, North Dakota, taking on too much of a mortgage,” he said. So funds investing in large domestic growth companies are up 7 percent for the year; those investing in midsized growth companies are doing even better, at 9 percent.
Mutual funds have also benefited from a rush of money away from hedge funds and private equity investments hindered by tougher credit standards, said Peter Martin, executive vice president for Natixis Global Associates, parent of various funds like Loomis Sayles Global Markets in Boston, up 10.6 percent this year. One of its comanagers, Mark Baribeau, said it is heavily weighed into foreign investments like Japan’s Nintendo that seem insulated from US housing concerns. It has also bought more growth companies that don’t have a lot of debt.
In Peabody, investment adviser Jack Bevilacqua said the only change he’s suggested for investors amid the recent volatility is to take gains in areas like specialized natural resources funds, up 15 percent for the year. But he’s only suggesting the sales “if people are really nervous,” Bevilacqua said. “Frankly, I think it will continue to go up.”
Source: Boston
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http://www.boston.com/business/personalfinance/articles/2007/08/31/mutual_funds_sidestepping_credit_woes/
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