2000 new millennium, new funds.

Author:KORN, DONALD JAY
Position:Mutual fund evaluations
 
FREE EXCERPT

B.E. finds 12 of the best bets for the new year--and beyond

FOR SHARON AND DARRYL WARD, THE ROAD TO wealth-building is paved with mutual funds. "We're in our 30s, so we have many years of investing before we retire," says Sharon, a financial programs specialist with the U.S. Treasury Department in Birmingham, Alabama. "Therefore, we invest mainly in stocks and stock funds where the long-term returns likely will be superior. I personally like to invest through mutual funds because I feel the diversified holdings provide safety."

Once a conservative investor, Sharon has evolved into a moderate risk-taker. On the other hand, her husband, Darryl, a mortgage banker, is a more aggressive fund picker. "We don't own a lot of small-company or international stocks," he says, "so our portfolio is tilted toward large- and mid-caps. I like to see a lot of technology stocks in the portfolio before I invest: I know they're volatile, but I think the long-term returns will be worth the risks."

As a result, the Wards have crafted an investment program that is a mix of moderate and aggressive funds. And as they have structured their portfolio, they have placed a high premium on consistent returns. "A few years ago, a specialized technology fund was suggested to me," says Darryl. "However, it had just returned 112% the previous year, so I was reluctant to invest because I didn't think it could repeat that performance. Instead, I invested in Fidelity Select Software and Computer Services Fund (FSCSX), which had a record that was good but not as great." Fortunately, he didn't regret that choice. Since he's held the investment, Fidelity Select has gained more than 30% per year.

FINDING FUNDS THAT SIZZLE

Many investors go through the same arduous process as the Wards when it comes to figuring out the next hot fund. The more misguided, however, conduct research akin to throwing darts at a board. So just how can you truly determine which funds will give you the best bang for your buck? To help you make this decision, BLACK ENTERPRISE consulted Morningstar, the Chicago-based mutual fund tracking service. Susan Dziubinski, editor of Morningstar Fund Investor, a monthly newsletter, has reviewed and helped us prepare a list of 12 hot mutual funds for the new millennium (see chart). OK, they may not last a thousand years. But the process that she used to select the funds is one that can easily be passed on to any generation of investors.

Instead of established funds, Dziubinski is drawn to young `uns--those vehicles that have yet to establish track records of more than a half decade. Why new funds? "Young, relatively small funds have some advantages," she says. "They may be more flexible than large, established funds, so they can take advantage of emerging trends."

Indeed, some of the funds on her list have produced a stellar performance. With mouthwatering 12-month returns as high as 98%, a number of them have outdistanced the Standard & Poor's 500.

Other factors for investors to consider: many of these young guns offer tax breaks. She maintains that "when it comes to taxes, they don't threaten investors with a `tax overhang.'" For example, if a fund created a decade ago has been tremendously successful in investing in the likes of Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC) and Cisco Systems (Nasdaq: CSCO), you may decide to scoop up shares. The next week, however, that same fund decides to unload all its tech-stock winners and move into utilities. When the fund sells its stocks, all its "realized capital gains" will be passed on to investors, even newcomers. That means you'll owe tax on those gains, even though you didn't fully enjoy them. "Young funds don't pose this problem," says Dziubinski, "so they may be especially suitable for holding in taxable accounts rather than tax-deferred retirement plans."

Some rookies offer lower costs--especially index funds. Byron Snearl of Los Angeles counts himself among those who have found the advantages of such vehicles. "I don't have the time to study the funds...

To continue reading

FREE SIGN UP