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401 (K) MUTUAL FUNDS BETTER THAN RETAIL FUNDS

- Alan Lavine and Gail Liberman



Guess what? Mutual funds in 401 (k) plans and those bought through financial advisers may be outperforming mutual funds bought directly from mutual fund companies or stockbrokers.

Mutual funds in 401 (k)s and those you buy from financial advisers are known as "institutional" funds. Although they are offered by many of the most popular fund groups, they differ from funds you would buy directly from those same groups.

Generally, groups like Fidelity, American Century, Pimco, Janus and Berger offer institutional funds through pension plans. Or, they might be offered through a financial adviser who charges a fee of 1 to 2 percent annually to put a client's money in them.

Over the past one, three, five and 10 years, the average institutional fund has outperformed the average retail stock fund sold directly to investors, according and analysis of Morningstar data.

Institutional funds grew at an 11.95 percent annual rate over the past 10 years ending in September. By contrast, the average retail fund gained 10.68 percent. In addition, Morningstar's data show that the institutional funds were less volatile. So investors got a better return and lost less on the downside.

Grant Rawdin, money manager with Wescott Financial Advisory Group in Philadelphia, PA. , cites a couple of reasons why institutional funds outperform their retail cousins: Expenses are lower on institutional funds. Plus, the money typically stays put because investors donít tend to bail out of institutional stock funds as they often do in retail funds when the market declines.

"The money is more stable in institutional funds," says Rawdin, who manages $500 million. "I use the Janus Advisor Growth Fund instead of the Janus Fund. It has outperformed the Janus Fund by 5 percentage points in return."

Hereís a look at the total returns on some of the top-performing retail funds that have a great deal of stable 401 (K) money invested in them. Data is from Morningstar and covers the past five-year period ending September 30, 2001:

  • Weitz Partners Value, up 21.8 percent annually.

  • Osterweis Fund, up 19.1 annually.

  • Alger MidCap Growth Retirement, up 17.96 annually.

  • ARK Small Cap Equity Institutional, up 17.4 percent annually.

  • Excelsior Institutional Mid Cap Value Fund, up 17.1 percent annually.

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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).


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