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THE NO-LOAD FUND INVESTOR
410 Saw Mill River Rd., Ste. 2060, Ardsley, NY 10502.
Monthly, 1 year, $139.
2003: An up year for the markets
Sheldon Jacobs believes 2003 will be a good year for equity markets.
"The economy is slowly turning around and the Fed's rate cuts will eventually take hold and stimulate a new bull market. Valuations, while not at traditional bear market bottom levels, are lower than they have been in recent years. Pre-election years have historically been the strongest of the four-year presidential cycle. In fact, markets bottomed in 11 of 14 mid-term election years since 1950, and we may have seen a bottom last October.
This is another year in which we have had to exercise a certain amount of discretion in choosing our Persistency of Performance selection for the coming year. As usual we are ruling out sector and international funds. This year we are also eliminating bear funds and market-neutral funds, both of which hold short positions. We do this because Persistency of Performance is a "real world" strategy, in which subscribers invest hard-earned dollars, and we believe 2003 will be an up year for the market.
Our selection this year is Royce Special Equity (RYSEX), a small-cap value fund that has done very well the last three years. Managed by Charles Dreifus for the past five years, the fund now has $394 million in assets, up from $219 million three months ago. The fund has 75 holdings with a median market cap of $520 million. The fund's average P/E ratio is a low 13.4. The fund seeks conservatively financed and managed owner-operated, i.e. family-type, companies. Chuck Royce and his crew are as good as it gets investing in the small-cap value sector. If the market favors this sector this year, or even if it is neutral toward the sector, the fund should do fine. If we have a strong up year, the fund will probably lag the bogey, but it will still post satisfactory gains."
ALL STAR FUND TRADER
P.O. Box 203427, Austin, TX 78720.
Monthly, 1 year, $249.
Precious metals funds were the top
mutual fund success story in 2002
Ron Rowland: "Gold: Gold and precious metals funds were the top mutual fund success story of 2002. Of the funds we track, Gabelli Gold (GOLDX) took top honors with a +87.2% return. The gold market is somewhat unique in that it can be defined by the bullion itself, or by stocks and mutual funds consisting primarily of mining companies. Gold bullion climbed from around $276 per ounce to more than $347 per ounce, a nearly 26% gain for the year. The Philadelphia Gold & Silver Index (XAU), the benchmark index for gold stocks and mutual funds, advanced 41% in 2002. Investing in gold via stocks and mutual funds is often considered a leveraged play on the price of bullion. Throughout the late 1980s, and most of the 1990s, the intermediate peaks and troughs of gold prices coincided with the peaks and troughs of the XAU. That changed in 1999 when gold hit a low near $252 while the XAU was 21% above its 1998 low and 38% above a subsequent low in 2000. Gold is now at its highest price since April 1997, but the XAU is nearly 25% below its April 1997 value. If the former relationship between gold and the XAU were to return, that would suggest that the XAU has some upside potential at current gold prices.
Bear Market Funds: With 2002 going into the record books as a bear market year, it is only fitting that bear market funds performed well. Prudent Bear (BEARX) was the winner in this category with its 62.9% return, surpassing the 50.9% return of Rydex Venture 100 (RYVNX), which is designed to generate a return that is twice the daily inverse of the Nasdaq 100 index.
Bonds: The bond market was a place to achieve positive returns in 2002. Vanguard Total Bond Index (VBMFX) returned +8.3% for the year, but most high-yield bond funds lost ground.
Real Estate: Although real estate grabbed a lot of headlines this past year, the Wilshire REIT Index StreetTracks (RWR) managed to advance only 1.7% and had an 18% drawdown along the way.
Money Market: Money market funds had one of their most pathetic years ever, returning approximately 1.2%. The yield on the average money market fund dropped from around 1.7% at the start of the year to under 0.9% by the end of the year, with most of that drop occurring in November in conjunction with the FOMC interest rate cut.
Financial Services: The financial services sector historically performs well in a falling interest rate environment. The average mutual fund in this sector lost about 10% this year but managed to outperform the market. Banking and real estate lending oriented funds, like Fidelity Select Home Finance (FSVLX), helped the group's overall average.
Health Care: The health care sector continued to slowly fade in the month of December, capping off a disappointing year. The HMO group had been an upside leader for much of the bear market, but Fidelity Select Medical Delivery (FSHCX) declined 29.8% since mid-June, ending that group's advance. The volatile biotechnology group lost more than 40% for the year.
Consumer Industries: The American Consumer had been given the credit for saving the economy from a prolonged or double-dip recession. However, consumer oriented stocks have weakened significantly the past six months and have failed to rally meaningfully from their October lows. Rydex Retailing (RYRIX) finished the year with a 23.4% loss.
Energy: The performance of the energy sector has been perplexing. The price of crude oil climbed roughly 50% in 2002, yet energy funds lost money. While crude oil advanced to new highs in December, Fidelity Select Energy (FSENX) finished the year 19% below its April high, illustrating that nothing can be taken for granted in this market.
Utilities: Falling interest rates and market weakness have historically provided this sector with better than average, if not positive, returns. However, many of the participants are reeling from the effects of energy trading scandals and overcapacity in the telecom utilities. Although Rydex Utilities (RYUIX) managed a 2.2% gain in December, it lost 32.4% for the year.
Technology: It was only a month ago that the technology bulls were declaring (for the second or third time) that a new bull market for tech stocks was underway. December alone produced bear market returns for many of these stocks as Fidelity Select Electronics (FSELX) dropped 21.1% for the month, increasing its annual damage to 50.5%. ProFunds UltraSector Wireless (WCPIX) had a tremendous +134% rally during part of the fourth quarter, yet it somehow still managed to shed more than 80% for the entire year.
Styles: The market, as measured by both the S&P 500 and Wilshire 5000, lost 22.1% for the year. S&P MidCap 400 Value was the top performing style index, holding losses to 11.6%."
THE FINANCIAL REPORT CARD
P.O. Box 7173, Kensington, CT 06037.
Monthly, 1 year, $79.95.
Entering a new phase
of the market cycle
Dr. Robert Valuk: "We are entering a new phase of the market cycle. Our "rear view mirror" projection that the market bottomed in the August/September doldrums seems to be correct. We get kudos for our call! We will now see market cycle investors making a gradual shift from value-based companies to growth-based companies and a shift into small-cap and mid-cap companies, which tend to outperform during the early stages of a new Bull market. We suggest you take your time in this shift, since we are and will continue to be in a trading market for the next 6-12 months. Long-term treasury bonds, a safe haven during the market collapse, will discount (incurring a capital loss) as the Federal Reserve Board gradually raises rates over the next two years. Junk bond funds, convertible bond funds, and corporate bond funds will do well as corporate America's bond default rate eases. Municipal bond funds will continue to be excellent for high-income investors.
Our value-based conservative philosophy suggests that our subscribers continue to purchase funds with low betas and yields above 1%. We would start to purchase Vanguard 500 Fund, Primecap, and Growth & Income. We would purchase convertible bond funds at Vanguard and Fidelity and would accumulate Fidelity Contrafund, Small Cap Independence, Balanced, and Mid Cap Value. The market will be "range bound" (trading within a range) for a while, and these purchases should be made using dollar cost averaging over the next twelve months. We strongly recommend the purchase of individual companies that pay dividends and have earnings that are actually increasing. As with all our recommendations, we insist on a cash/bond reserve of at least 30% or your present age in percent at all times. We also insist that our subscribers always use dollar cost averaging to purchase funds and/or individual stocks."
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Road, Suite 301, McLean, VA 22102.
Monthly, 1 year, $129.
Past volatility in utility funds
should work to their favor in 2003
Roger Conrad: "Utility mutual funds have been as volatile as any other sector in the past several years. That should work to their favor in 2003, particularly for MFS Utilities (MMUFX 6.35, 800-637-2929, 4.75 percent load, $1,000 initial minimum investment/$50 thereafter).
I normally avoid loaded funds. But run by Maura Shaughnessy for the past 11 years and rated four stars by Morningstar, MFS is stocked with UF favorites and has a habit of outperforming in bull markets, averaging a 23 percent-plus yearly return from 1995 to 20000, Long-term investors looking for a utility fund can buy MFS up to 7.
MFS' chief drawback is a low yield. For income, it's better to build your own fund with direct purchase plans: Atmos Energy (800-382-8667, $200), BP Plc (877-272-2323, $250), ChevronTexaco (415-894-7700, $250), CMS Energy (517-788-1868, $500), Dominion Resources (800-552-4034, $250), Duke Energy (800-488-3853, $250), Energen (800-654-3206, $250), Entergy (800-333-4368, $1,000), Great Plains Energy (800-245-5275, $500), KeySpan Energy (800-482-3638, $250), MDU Resources (800-813-3324, $50), Peoples Energy (800-228-6888, $250), Philadelphia Suburban (800-205-8314, $500), Piedmont Natural Gas (800-937-5449, $250), SBC Communications (800-351-7221, $500), Southern Company (800-565-2577, $250), Verizon Communications (800-631-2355, $1,000), Vodafone (888-BNY-ADRS, $200) and Xcel Energy (877-778-6786, $1,000)."
EQUITY FUND OUTLOOK
P.O. Box 76, Boston, MA 02117.
Monthly, 1 year, $139.
Technicals don't support the notion
that we moved into a Bull market
Thurman Smith: "Although January so far has been encouraging, don't assume that a bull market started in October. The technical picture just does not yet support that notion with enough conviction to make bold moves into faster-moving funds. Do stay invested in high ISQ funds, keep average risk of your portfolio below your usual ceiling and allocate for as much variety of approach as fund ratings will allow. Don't fret if you are overweighted in caps and styles that have momentum. The typically five-year small-cap outperformance cycle is probably not yet over.
Tax-advantaged portfolios: When you have the cash available, make as much of your 2003 IRA contributions as you can. Self-employed SEP IRA holders have to be careful not to over-contribute, as undoing excess contributions is very messy.
Taxable portfolios: If you have a tax loss carryforward from last year, look for an opportunity to use it by selling something that has a similar size unrealized gain. It is too early to tell whether the Bush plan to not tax dividends will be enacted, so don't make major changes to your strategy based on any assumptions."
MUTUAL FUND MONITOR
1412 Spruce Street, Berkeley, CA 94709.
Monthly, 1 year, $79.
Portfolios remain in a defensive position
Larry Luce: "For the first time in many moons a few hopeful signs are appearing.
First, there is some indication that companies may begin to loosen purse strings on capital spending. This is a long-awaited sign that the end of recession may be in sight.
Second, some fund managers report that values are beginning to appear.
Also note that the Bush proposed dividend tax cut would generally benefit equities (at the expense of municipal bonds, tax-deferred annuities, and bank deposits).
Against these, the main spoiler is the proposed Iraq War
Also, while we have had a correction, we have not yet had the over-correction that has marked excesses of the past.
Given these uncertainties, I am leaving the Model Portfolio the way it is defensive, but in a position to participate if the market moves up."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
Five top fund picks for 2003
Richard Moroney: "While most mutual funds finished in the red again for 2002, you should not chalk it up simply to "another bad year." If your fund consistently underperforms its peer group, there is good reason to believe it will be a laggard in 2003. Academic evidence suggests that lousy funds tend to stay that way. Listed below are our top five picks among Forecasts recommended funds. All five funds would be good upgrade candidates. These funds have three common traits that should give them a leg up in 2003: expense ratios below peer-group averages, above-average performance in recent years, and moderate relative risk.
Fidelity Export & Multinational holds large-company stocks, though roughly one-quarter of the portfolio is in midcaps. The fund invests primarily in domestic companies that are expected to benefit from selling their goods or services outside the U.S. Fidelity Export & Multinational is considered a nondiversified fund and can concentrate its holdings in certain sectors or industries. During the third quarter, portfolio manager Tim Cohen overweighted media, health-care equipment, and services stocks. At the end of September, the 10 biggest holdings made up 26% of the portfolio. The three largest positions were American International Group, a leading insurer, as well as Citigroup (NYSE C $37) and Pfizer (NYSE PFE $32). The fund's turnover rate is fairly high at 228%. Fidelity Export & Multinational ranks among the top 15% of large-cap blend funds for one, three and five-year total returns. This no-load fund charges a 0.89% annual expense ratio.
Neuberger Berman Fasciano is out top pick among small-cap growth funds. The median market value for the stocks in the portfolio is only $1 billion. At the helm since 1988, portfolio manager Michael Fasciano looks for reasonably valued companies that can increase earnings 15% to 25% annually. Moreover, he screens for solid balance sheets, robust cash flow, and sizable insider ownership. Fasciano believes smaller companies are easier to understand and have more transparent financial statements, making them particularly attractive investments in the near term. At the end of October, the fund held 66 stocks spread over several sectors. The 10 largest positions represent about 30% of assets. Leading industry exposures include media (18% of stocks), health care (16%), and business services (14%). Although the fund has declined this year, it has significantly outperformed its peer group and the Russell 2000 Index of small-cap stocks.
UMB Scout WorldWide invests in large, established companies either located outside of the U.S. or whose principal business is carried on overseas. Occasionally, UMB Scout invests in developing countries. Because the returns of foreign blue chips are closely correlated with those of large U.S. stocks, the fund's performance may move with the overall market. As of Oct. 31, 58% of the fund was invested in the U.K. and Western Europe. Major weightings include Japan (16% of assets), United Kingdom (15%), and Australia (9%). The fund invests no more than 25% of its assets in any one country. Note that international funds present additional risks because of foreign-currency fluctuations, political factors, government regulations, and differences in accounting standards. Still, the fund's standard deviation, a measure of volatility, is much lower than its peers. The fund's five-year annualized return of 1.5% ranks among the top 18% of international funds.
Vanguard High-Yield Corporate sticks to its knitting. Unlike many of its rivals that hold common stocks, the fund is fully invested in bonds mostly junk bonds that pay high interest rates because they are riskier than investment-grade bonds. However, long-time portfolio manager Earl McEvoy, unlike his peers, holds high-yield bonds with higher credit ratings. At the end of October, the fund held 250 bonds diversified across various maturities and sectors. The biggest sector bets are telecommunications (15% of assets), basic industry (14%), and consumer cyclical (13%). Currently, the fund yields 8.3% versus less than 5% for most investment-grade bond funds. The fund's duration is 4.4 double the level of the Vanguard Short-Term Corporate fund. So, if interest rates increase by one-half percentage point, the fund's price would be expected to fall 2.2%, or twice as much as the short-term bond fund. At 0.27%, the expense ratio is below its peer-group average of 1.25%.
Vanguard Short-Term Corporate, which yields 3.9%, is a good pick for safety and income. For a little extra risk compared to money market funds, investors can gain more than two percentage points in yield. Still, the fund is managed for total return, rather than just current income. Over the last 10 years, Vanguard Short-Term Corporate has notched an impressive 6.2% annualized return. A well-diversified portfolio tilted toward high-quality, short-term bonds helps reduce volatility. The fund, which holds more than 400 positions, sports an average maturity of 2.6 years. Lead manager Robert Auwaerter places sizable bets on finance (38% of the portfolio) and industrial (31%) bonds. Recent performance has been hurt by the fund's energy and telecom holdings. Moreover, competing funds have held large stakes in better-performing mortgage-backed bonds. Still, the fund is up a respectable 4.3% so far in 2002. Moreover, Vanguard Short-Term Corporate has handily outpaced its average fund competitor during the last three, five, and 10-year periods. The fund has had only one losing year since 1983."
CLOSED-END COUNTRY FUND REPORT
725 15th St., Ste 501, Washington, D.C. 20005.
Monthly, 1 year, $225.
Top 10 political/economic/investment
predictions for 2003
James Libera: "We think it will be a positive period for international equity markets. However, there are obvious challenges to overcome in this perilous world before investors feel safe again. Here are our top ten political/economic/ investment predictions for 2003:
1. The U.S. will win quick, decisive victory in Iraq, sometime in the February-April period. The aftermath will be messy and drawn out, and there will be charges of ugly Americanism around the world, but the war will improve global confidence and the overall stature of the U.S.
2. The standoff with North Korea over nuclear weapons will be resolved through diplomatic means. China will be helpful in the resolution, ushering in a temporary improvement in Sino-U.S. relations.
3. Al Qaeda will stage a couple of successful terrorist attacks, in both Europe and the U.S. by the end of the year, however, Al Qaeda will be a spent force, despite the lack of a definitive coup de grace against the organization.
4. The U.S. economy will exhibit mixed signals in the first quarter of 2003, but by the third quarter, an unambiguous acceleration will be evident. U.S. GDP will rise by 2.5 3% over the course of the year. The Federal Reserve Board will not need to ease again, and the next move will be to tighten, in the fourth quarter. U.S. equity markets will rally after the war with Iraq, but will end the year with minimal gains, as the still-high valuations and residual corporate problems bring prices back down.
5. The global economy will take its cues from the U.S., starting the year slowly and accelerating in the second half. Global GDP will rise 3 4%. Undervalued emerging markets will be the best performers among equity markets.
6. Europe will recover slowly, with Germany particularly sluggish and Chancellor Schroder under major pressure. The EU will look increasingly unwieldy, as the organization prepares to expand to 25 countries. Selected European equity markets will shine, but the region as a whole will lag.
7. In central and southern Europe, all ten candidate countries will ratify accession to the EU, overcoming the last potential obstacle to membership. The economies and financial markets of eastern Europe will continue to converge towards those of western Europe. The region's equity markets will strongly outperform again in 2003.
8. Japan will undergo a major financial shock, prompting a push for meaningful restructuring. But special interests will again block appropriate reforms. Japan will suffer another year of minimal growth and deflation.
9. China will grow strongly in 2003, but political instability will increase as the closure of inefficient state industries adds millions to the army of unemployed. Regionally, the threat of Chinese military and economic dominance will add to feelings of insecurity. Nevertheless, Asian economies and equity markets will again outperform.
10. Brazil will not default on its debt. Nevertheless, the Lula government will spend 2003 attempting to stabilize the economy. Both Mexico and Chile will take advantage of an improving U.S. economy with strong equity gains."
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-- February 2003