YOU ARE HERE: LAT HomeCollections

Wall Street, California: Third-Quarter Fund Review
and Outlook

Pain Was Spread Unevenly Among Popular 401(k) Funds


If you haven't received your quarterly 401(k) plan statement yet, you will. Soon.

And you probably won't like what you see.

For the first time, possibly since you began investing in your company-sponsored retirement plan, you'll notice that most of your stock funds have lost money--both over the last three months and on a year-to-date basis.

And those nice, fat 20%-plus annual return figures many of you have grown accustomed to over longer periods have most likely disappeared.

What should you do?

To help you decide--and to gauge how well your 401(k) funds are doing relative to their peers--we've prepared a snapshot of how some of the most popular 401(k) funds offered by Southern California employers have done recently:

Large Growth

Vanguard U.S. Growth

3rd Qtr: -9.4%

Comments: This $11-billion fund held up better during the third quarter than the average large-cap growth fund, which fell 11.2%.

Unlike most growth funds, which seek out the fastest-growing companies in various sectors, Vanguard U.S. Growth will invest in companies growing 13% to 15%--modest by the standards of most growth funds--provided they have strong balance sheets.

Co-managers David Fowler and Parker Hall believe these companies will do a better job meeting earnings expectations than the highfliers. And during the recent market slide, companies able to meet earnings expectations held up far better than those that couldn't.

Year-to-date, U.S. Growth is up 12.2%. Over the last three years, it's delivered annualized returns of 23.9%. It's a keeper.

Fidelity Growth Company

3rd Qtr: -8.3%

Comments: There's good news and bad news when it comes to this $8.7-billion fund.

During the quarter, Fidelity Growth Company held up significantly better than its peers. In fact, the fund fell about 26% less than the typical large-cap growth fund.

To some degree, that's because the fund hasn't invested as heavily as its peers in financial stocks, which have been battered over the last three months on fears of a pending global financial crisis.

Longer-term, the picture's a bit murky. Year-to-date, Growth Company is up only 5%. And over the last three years, the fund has returned just 13.6% a year, at a time when the market drove up the prices of many large-cap growth stocks. Morningstar analyst Russel Kinnel wrote in a recent report that manager Steve Wymer had a tendency to hold on to losing stock picks too long. Despite its short-term performance, you may want to see if your company offers a better large-cap growth fund in its 401(k) plan.

Large Value

Fidelity Equity-Income

3rd Qtr: -12.9%

Comments: If you're looking for the average large-cap value fund, you've found it.

During the third quarter, this $20-billion fund fell just slightly more than the average large-cap value fund. Year-to-date, Equity-Income is down exactly the same amount as its peers. And over the last three years, it's generated annual returns of 17.3%, once again just slightly more than its peers.

Is this a bad thing? Not really.

Equity-Income follows a sound philosophy of investing. It tends to buy large blue-chip U.S. stocks, leaders in their respective industries, with above-average dividend yields. Dividend income protects a fund's returns when the market is flat or losing ground and boosts returns when the market is soaring.

Neuberger & Berman Guardian

3rd Qtr: -26.2%

Comments: This $2.1-billion large-cap value fund has seriously disappointed of late. Over the last three months, this fund has lost more than twice as much as its peers.

Why has the fund underperformed so badly? In its search for cheaply priced stocks, Neuberger & Berman Guardian invested heavily in financial stocks, which were hammered during the quarter.

Also, because the biggest large-cap stocks had become so pricey recently (at least in the months leading up to this correction), Guardian invested in smaller companies in its large-cap universe.

But that turned out to be a bad move, at least so far. In recent months as well as years, larger stocks have performed better than smaller ones.

Year-to-date, the fund is down 16.9%, while its peers are down only 3.1%. And over the last three years, the fund has gained just 4.6% a year on average. That's about a third what the typical large-cap value fund returned.

Large Blend

Fidelity Magellan

3rd Qtr: -11.1

Comments: In case you haven't noticed, the nation's largest mutual fund--and the most popular fund among the nation's 401(k) investors--is back.

Over the last three months, Magellan lost slightly less than the typical large blend fund. And year-to-date, the fund is up 5%. That may seem modest, but those returns are more than twice that of the typical large-cap blend fund.

To be sure, on a three-year basis the fund is still lagging. But remember, manager Robert Stansky has only been in charge of the fund since 1996. And in that time he's made some astute calls, especially with health-care stocks.

Fidelity Growth & Income

3rd Qtr: -8.3%

Los Angeles Times Articles