Editor's note: The Investing column will feature guest writers in the coming weeks.
We are all busier than ever these days, certainly too busy for the research needed to pick stocks with confidence. So busy people with money to invest often turn to mutual funds. True, most funds have underperformed the indexes by which they measure themselves (the second quarter was an exception), but some have managed to beat the indexes often enough, and we don't give up trying to find the ones that will excel.
Reasonable enough behavior, but what is really puzzling to me is that so many people who are far too busy to research individual stocks have no problem jumping unadvised into mutual funds that invest in a single industry sector or country. Mutual fund companies will market anything that sells, and they sell millions of people on single-country or industry funds for a simple reason: There always will be some people who want to own a piece of whatever is the best-performing market at that moment.
Ask yourself: If you want someone else to do the research on individual stocks, what makes you think you can pick winning individual sectors or countries? Sometimes the fact that a stock has risen sharply is the worst reason to buy it, and that applies to countries and sectors, too. Japan's Nikkei 225 index passed the 38,000 mark earlier this decade, for example, but it's been a losing investment since. All stocks do not go up all the time, even though for the past few years in America, it seems as if they do.
How are you supposed to know whether now is a good time to move into a Japanese country fund, or into American paper stocks, for instance? For those short of time for reading, it makes sense to stick with general funds that can invest in whatever the tried and tested manager thinks is worthwhile. Warren Buffett's company, Berkshire Hathaway, is way overweight in insurance. If you are the typical wealthy Berkshire stockholder, you stick with the stock not because you love the insurance business but because you think Warren Buffett knows what he's doing.
What made the Fidelity Magellan Fund under Peter Lynch so marvelous all those years was that he was able to load up on whatever he wanted. When savings and loans looked cheap to him, he bought a bunch. Having Peter Lynch move your money out of commodities, for instance, and into banking is a lot more efficient than having to shop around for a banking fund for yourself.
Sector picking is still an art today. Over the five years ending June 30, science and technology funds posted an average total return of 31.9 percent, according to Lipper Inc., one of the best performances of any group of sector funds. But for a time in the second quarter, technology stocks lagged badly behind stocks in natural resources as oil and other commodities rose in response to improvement in many Asian economies. If you were investing then, sector pickers, should you have put the money into commodity funds in the hope that world growth would continue, or plow even more money into tech stocks?
I suggest that without a lot of research--the kind that would also allow you to pick individual stocks--such decisions are best left to tried and tested managers who run high-performing, low-cost funds with good track records. These managers rely on research that you may not have, and they are also better able to hedge at low cost any big positions or currency risk they may run.
Of course, there is a downside to leaving the sector- and country-picking to someone else--if you can't stand not being first. By nature, if you invest with more diversified funds, there is always another fund doing better than yours.
Searching for a good generalist fund involves the same rules you would apply to shopping for a fund with a narrower focus. Look for a manager who has a decent track record, preferably at least five years, and a reasonable expense ratio, preferably around 1 percent or less.
Find out, too, how this manager does in bear markets as well as bull phases. Stocks purchased in early 1929 did not rebound until the 1950s, and by several classic valuation measures, the U.S. market could be on the verge of an extended rough patch.
A favorite fund of many others and of mine is the Janus Mercury Fund (1-800-525-8983), managed by Warren Lammert since its inception in 1993. Lammert has the same freedom Peter Lynch had at Magellan: He can invest in pretty much anything he wants, often sticking as much as 30 percent of his fund in overseas stocks. Currently, U.S. companies make up about 88 percent of his holdings, because "today I'm finding more ideas in the U.S." than anywhere else, he said.
In the five-year period ended Friday, Mercury delivered an annualized return of 34.2 percent, a superior performance, while charging no front-end load and managing with a total expense ratio of less than 1 percent a year. Lammert had a bit less than a third of his fund in technology stocks as of May, with another 28 percent or so in consumer cyclicals. This is comforting, since other funds with returns similar to Janus Mercury's are much more heavily weighted in tech stocks. Like many managers, Lammert's top holding at most recent reporting was America Online Inc. (AOL), followed by Time Warner Inc. (TWX).
Another strong performer, though a little more expensive and more heavily weighted in technology, is the Reynolds Opportunity Fund (1-800-773-9665). It has no front-end load, which is more than can be said for plenty of high-performance funds that have also loaded up on Microsoft Corp. (MSFT) or AOL. Frederick Reynolds has been in the manager's chair since 1992.
Looking to overseas markets, the Oakmark International Fund (1-800-625-6275) is one of the few top international investors with a five-year track record. (Its average annualized return is 11.9 percent.)
Manager David Herro has been at it since 1992, and he avoids weighting to an international benchmark, a system that makes managers invest more for the country than the company. Instead, he picks stocks he likes wherever they happen to be, except that he doesn't invest in the United States. This works in his favor, in my mind. With the U.S. market pricey and the rest of the world still showing more value, I like the fact that this is an international fund. Herro says of many of his competitors: "Europe's had a three-year run, and they've all flocked there. They became Europe funds. We've stayed diversified because we saw value in these markets [Asia] when they lost 80 percent of their value. It hurt us at first when we were doing it" but now has paid off.
The fund will always underperform whatever region is hottest because it is diversified, which ensures some insulation from a crash in any one region: Fifteen percent is invested in Latin America, 45 percent in Europe, with the rest in the Pacific Rim. Big holdings include British adverting agency Saatchi & Saatchi (ADR code SSA) and Citizen Watch of Japan (7762 JP and also listed in London).
Philip Segal is the International Herald Tribune's Hong Kong correspondent.