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Mutual funds are not what they used to be

- Alan Lavine and Gail Liberman

Things sure have changed in the last two decades. And that could be why stock funds are performing so poorly.

It used to be that fund managers had flexibility. They were able to keep money in cash so that they could take advantage of good buys on attractive stocks. Or, when the investment climate looked bad, they could increase their mutual funds' cash positions. With more money in cash, the funds didn't stand to lose as much.

Many fund managers also bought large, medium or small company growth or value stocks, depending on what they believed would perform well.

Today, fund managers' hands are tied. Almost all mutual funds must be put into an "asset class" or category, based on what the industry calls "investment style." And fund managers have strict investment style guidelines, based on the category of their funds.

This newer system is aimed at making professional money management easier. The whole idea is based on the idea that different types of stocks do better or worse at different times. So by putting your money in a variety of categories, you won't get as much fluctuation in the value of your overall investment.

So fund managers today often must invest in one of the following asset classes:

  • Large company growth stocks.
  • Large company value stocks.
  • Medium size company growth stocks.
  • Medium size company value stocks.
  • Small company growth stocks.
  • Small company value stocks.
  • Blended funds or funds that invest in both growth or value based on large medium and small sized companies.

Aha! But what if you are the poor sap who doesn't have a half-dozen mutual funds? Or, what if you can't afford to pay an adviser a 2 percent annual fee on top of your mutual fund expenses? Then, unfortunately, you're stuck with a fund that is fully invested at all times.

That's too bad. James Craig, former manager of the Janus Fund, in the 1980s and early 1990s, used to put money in cash to play it safe or when he couldn't find good growth stocks at reasonable prices. During that time, the fund did well in both up and down markets.

Now, to perform the same hat trick, you must own different kind of investments to limit your risks of losing money. So it's up to you to do the work yourself or hire someone to hold your hand.


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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