- The Washington Times - Thursday, October 3, 2002

With nearly every mutual fund category suffering double-digit declines this year, investors might be surprised to learn that some funds aren't doing that badly by comparison, at least.
It's true that telecommunications funds, technology funds and those funds that invest in growth-oriented companies continue to be the worst performers. This year those categories have posted negative returns of 49.8 percent, 48.9 percent and 30 percent, respectively, according to Lipper Inc., which tracks mutual funds.
But T. Rowe Price Media & Telecom has a year-to-date negative return of 35.6 percent. Better yet, one of the Huntington New Economy funds has a negative return of 12.7 percent.
And the Millennium Growth has a slight negative return of 0.9 percent.
When a fund performs significantly better or worse than its competitors, it's usually because it has a different mix of stocks.
But while it might be tempting for investors to dump their bigger fund losers in favor of better performers, the pros recommend that investors do some research before making any moves. In this case, investors should look to see that a fund's holdings truly reflect its investment objectives, and that it fits an investor's own needs.
"The first thing people should look at is what are the holdings in the funds because funds engage in fairly different strategies," said Eric Tyson, author of "Mutual Funds for Dummies."
"You could be fooling yourself into thinking that it is a good fund in its group when it may not be doing what [you think] it is supposed to be doing," Mr. Tyson said.
For example, one small-cap fund might focus more on health care, making it less attractive to an investor who already has a health care fund. Meanwhile, another small-cap fund might have a heavier concentration in financial issues. Or one technology fund might specialize in computers and another in biotech pharmaceuticals.
"The other reason you need to dig into the holdings of a fund is to make sure you have a diversified portfolio," Mr. Tyson added. "If you need a small-cap fund but you buy one that doesn't have many small cap stocks, then you aren't diversified."
By law, mutual funds must have the majority of their portfolios invested according to their classifications. Sector-specific funds those in real estate, technology, Latin America must have 80 percent of their holding in their sectors.
All other funds, generally those that identify themselves by size or by either the growth style or value style, have to remain 65 percent true to the definition they provide in their prospectuses.
But these rules leave room for funds to invest outside of what their name suggests. For example, global funds can invest in domestic companies, and growth funds can hold some value-oriented blue chips.
Investors should read fund prospectuses and look up fund holdings on financial Web sites such as www.morningstar.com, Mr. Tyson said.
It's also a good time to brush up on terms used in mutual funds' names.
Value funds invest in stocks that are considered to be undervalued compared with their earnings or market value. They generally perform better than growth stocks those in which companies reinvest earnings to grow their business in bear markets. Some of the growth funds faring better in the market today have value holdings.
Some funds opt to combine the value and growth styles. Lipper calls such funds "core," while Morningstar refers to them as "blend."
Funds are often categorized by size, using the terms large-cap, mid-cap and small-cap. Large-cap funds focus on large-capitalization companies, which typically have market capitalizations of $9 billion or more. Small-caps are those with a market cap of less than $1 billion; while a multi-cap fund is one that includes companies of all sizes.


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