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AVOIDING GUT-WRENCHING FUND GYRATIONS

- Alan Lavine and Gail Liberman



When a fund manager owns stocks that are in favor, that fund manager is a star. When the same stocks are out a favor, that same manager can be a real bum.

And everything seems to go around in a big circle.

In the meantime, everyone wants you to buy and sell your mutual funds. It's no wonder. Commissions generate lots of money.

It's very easy to get tempted. The magazines always are focusing on a fund that is burning the house down.

Next thing you know, you'll read a report about why a particularly well-managed fund suddenly is doing poorly.

Does this sound at all familiar?

It should. A few years ago, people were asking questions about the Oakmark Group of Funds, which buys undervalued stocks. Had the group lost its touch? On the other hand, the Janus Group of funds became the hot Wall Street darling. Everyone wanted to own virtually any fund in the Janus Group.

Now the tide has turned 180 degrees. Everyone is wondering what happened to Janus. Has it lost its touch? The stars in today's market should come as no surprise. They are Oakmark's portfolio managers!

I don't know about you, but this drives me nuts sometimes.One alternative may be to own a mutual fund that buys companies based on solid long-term profits. This way, you don't have to worry.

There are several funds that buy and hold stocks for at least seven years before they sell. They buy a stock when it gets knocked down. They only sell if they can find a better one. Typically, they target companies with long-term potential.

Because the fund buys and holds stocks, you don't get hit with fat year-end capital gains distributions. So you will have higher after-tax returns on low-cost mutual funds that buy and hold stocks.

There are a few of these funds around based on data of Morningstar Inc., Chicago. Contrary to popular belief, they are not undervalued stock funds either. For example:

  • Barron Asset Fund buys and holds mid-size growth stocks. The fund has grown at a 13.8 percent annual rate over the past 10 years. It generally owns stocks for more than 10 years, and has outperformed the S&P 500 over the past 10 years.

    Last year, the fund lost -10 percent. The average stock held by the fund is growing earnings at 15 percent annually.

  • Vanguard Prime Cap. This fund buys and holds both undervalued and growth stocks for close to 10 years. It has outperformed the market over the past three-year, five-year, 10-year and 15-year periods. Over the past 10 years, it has grown at a 17.56 percent annual rate. Last year, the fund lost -13.35 percent. The average stock held by the fund is growing earnings at 18 percent annually.

  • T. Rowe Price Small Cap Value Fund. This fund buys and holds undervalued small companies for seven years. It has outperformed the market over the past one, three and 10 years. Over the past 10 years, it has grown at 14.63 percent annual rate. Last year, the fund gained 21.94 percent.

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    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).


    To read more columns, please visit the column archive.




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