Mutual Funds

'Better safe than sorry" turned out to be the winning motto for many mutual fund managers and their investors, as 2007 made a sudden transformation from an easy-money era to a painful credit crunch. When the debt markets seized up in the wake of the housing downturn and mounting mortgage defaults, bond funds that shunned risky sub-prime securities in favor of government IOUs and other relatively safe holdings notched solid returns.

You were more likely than not to make money in U.S. stock mutual funds in 2007. But some investors may wonder if it was worth the risk. The average domestic stock fund scored a total return of 6.4% last year, according to investment research firm Morningstar Inc. That was the weakest calendar-year gain since the bull market began late in 2002, and was down from the 12.6% average return in 2006. By contrast, money market mutual funds generated an average yield of 4.

For stock mutual fund managers and their investors, some trends accelerated in 2007 -- and some came to a screeching halt. Here are a few of the industry highlights for the year. U.S. individual investors continued to be ravenous for foreign-stock mutual funds last year, at the expense of domestic stock funds. Investors pumped a net $129 billion into foreign funds in 2007 through November, lifting total assets to $1.

When Sam Ahmed needed help investing the proceeds from the sale of his overnight-delivery business, he didn't want to hire a pricey advisor or rely on generic information from the Internet. So he turned to a financial planner at Vanguard Group Inc., who recommended a slate of mutual funds. Because Ahmed's portfolio exceeded $500,000, the advice was free. "It was an excellent middle ground for me," the 55-year-old Missouri resident said. "I didn't have to pay $2,000 or $3,000."

John Marks Templeton, a pioneer in the investment industry and a champion of spiritual research who founded the annual Templeton Prize, died Tuesday of pneumonia at a hospital in Nassau, the Bahamas. He was 95. Templeton created one of the first internationally diversified mutual funds in 1954, when most U.S. investors were reluctant to put money in foreign stocks, and became a billionaire. He devoted his latter years to philanthropy and the promotion of religion.

Foreign stocks had been the shining stars in many U.S. investors' portfolios from 2003 through 2007. This year, they're beginning to look like black holes. With the global economic outlook fading and the dollar rebounding, Americans' foreign holdings are suffering a double-whammy. If you haven't checked your portfolio lately, you may be in for a shock. The average foreign stock mutual fund has plunged 18.1% year to date, according to Morningstar Inc. That's more than double the 8.

Money market mutual fund companies scrambled Wednesday to calm their clients' fears after the pioneer of the asset class "broke the buck," falling below the industry standard $1 per share in value. Companies including Fidelity Investments, Charles Schwab Corp. and Vanguard Group posted online alerts noting that their funds had little or no exposure to troubled financial firms such as Lehman Bros. Holdings Inc.

Investors with their nest eggs stashed in many money market mutual funds will soon have a U.S. government safety net akin to what bank depositors have long enjoyed. Moving to halt a broad run on the funds, the U.S. Treasury on Friday offered as much as $50 billion in insurance coverage to protect the beleaguered, cash-like investments. The government said that for the next year it would insure the holdings of any retail or institutional fund that pays a fee to participate in the program.

An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills. Wachovia Bank, trustee for the $9.3-billion Short Term Fund offered by Commonfund, said Monday that it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets.

Normally, losing 5% in a bond mutual fund in a quarter would be considered a terrible performance. But with double-digit stock market losses so widespread in the three months ended Sept. 30, the bond market's red ink seemed much easier to bear. That story line has continued in spades in the fourth quarter, just 12 days old. Many bond funds again are in the red, but far less so than stocks, which have been brutalized by relentless selling.