Mutual Funds

Investors placing their bets for 2012 are faced with the classic dilemma: Stick with market sectors that performed best last year or search for value in beaten-down names? The question is especially tricky considering that 2011 was a turbulent ride of mixed economic news at home, worse news abroad and painful sell-offs that tested even seasoned traders. Investors' reaction was textbook -- dive into stock mutual funds stuffed with big, dividend-paying companies known for relative stability in good times and bad. That meant top-performing funds focused on utilities, consumer staples and healthcare companies.

The appeal of age-based mutual funds is that investors generally don't have to worry about them. The funds are geared toward long-term goals such as retirement or a child's college education, and automatically shift into more conservative holdings over time. That normally means selling stocks and buying bonds. Today's ultra-low interest rates, however, pose a challenge for investors in these funds. As the U.S. economy gains steam over time, interest rates are likely to rise.

In the early 1990s, executives of the now-defunct American Stock Exchange hatched a revolutionary idea: a hybrid mutual fund-type investment that would trade like a stock. But in an era when hot-handed mutual fund managers had rock-star status, the concept of the “exchange-traded fund,” or ETF - low-cost, pre-programmed portfolios designed to simply replicate a broad or narrow swath of the market - didn't get a lot of people's hearts pounding. Twenty years later, however, exchange-traded funds have ballooned into a $1.4-trillion industry in the U.S. and $2 trillion worldwide.

In the early 1990s, executives of the now-defunct American Stock Exchange hatched a revolutionary idea: a hybrid mutual fund-type investment that would trade like a stock. But in an era when hot-handed mutual fund managers had rock-star status, the concept of the “exchange-traded fund,” or ETF - low-cost, pre-programmed portfolios designed to simply replicate a broad or narrow swath of the market - didn't get a lot of people's hearts pounding. Twenty years later, however, exchange-traded funds have ballooned into a $1.4-trillion industry in the U.S. and $2 trillion worldwide.

It looks like actively managed stock funds can't beat the market -- even when the market itself is struggling. More than four out of five actively managed U.S. stock funds trailed their underlying indexes in 2011, even though the stock market plodded through an uninspiring year, according to new research . An analysis by Standard & Poor's Corp. found that 84% of funds underperformed last year. That's even worse than their dismal showings in the recent past. Over the last three years, 57% of funds trailed their indexes.

The appeal of target-date mutual funds is their exposure to so many parts of the financial markets. It's also what caused target funds to lose money in the second quarter. The average target fund lost 2.8% from April to June, dragged down by the nearly 7% loss in their non-U.S. stock holdings, according to Ibbotson Associates. That was a reversal from their 9% rally in the first quarter. Target funds are now down over the past 12 months, with the average fund off 0.5%. That's also driven by non-U.S.

Exchange-traded mutual funds that use risky strategies in pursuit of outsized returns are not making the stock market more volatile, according to a study by Morningstar Inc. The report argues that so-called leveraged ETFs, which attempt to magnify underlying moves in stock prices, have had little effect on the market's heightened volatility in the last few years. Instead, the study says, fundamental factors such as corporate earnings play a far bigger role. The fund-tracking firm is walking a fine line of sorts in its report.

Mutual fund investors should always take note of what investing fees they're being charged, particularly in this tough investing climate. Transactions: The costs associated with an individual investor's transactions and account are listed in a fee table, located near the front of a fund's prospectus, under the heading "Shareholder Fees." They include: * Sales loads: A fee charged to compensate the brokers.

Average total return, including dividends, in percent for periods ended Thursday, Oct. 11. Category (No. of funds) Week Year-to-date 12 months International: foreign +0.65% -11.1% -5.1% stocks only (56) Utilities (15) -1.14 -8.2 -3.1 Global: U.S. and foreign -1.23 -12.5 -9.5 stocks (42) Fixed income (535) -1.25 +0.2 +1.4 Balanced: stock and bond (60) -3.12 -7.8 -7.8 Equity income (66) -3.80 -13.7 -14.1 Natural resources (19) -4.36 -6.6 -1.2 Health/biotechnology (9) -4.46 +1.0 +3.

The number of U.S. households owning mutual funds fell for the first time in 15 years in the 12 months ended in May, amid the longest stock decline since the Great Depression. About 54.2 million households, or 50% of those in the U.S., owned mutual funds in May 2002, according to the Investment Company Institute, the industry's trade group. That's 3.7% less than a year earlier. The number of households owning funds doubled in less than 10 years from 25.8 million, or 27% of the country, in 1992.

Global financial markets overcame a torrent of fears in 2012 to post strong gains nearly across the board. Returns on most categories of stock mutual funds were in double digits. The average domestic equity fund generated a total return (price change plus dividend income) of 15%, after losing 2.5% in 2011, according to investment research firm Morningstar Inc. It was the third calendar-year gain in the last four years, as the bull market that began in March 2009 rolled on. Bond mutual funds also posted positive returns as market interest rates continued to slide, boosting the value of older bonds issued at higher rates.

Another hedge fund manager is joining Bill Ackman in the ranks of Herbalife haters. Whitney Tilson, who helps run three hedge funds and two mutual funds through T2 Partners, said in a mass email Wednesday that he's short “a tiny smidge” of Herbalife and other so-called multilevel marketers who sell products through individual distributors. Herbalife, the Los Angeles provider of health supplements, has seen its stock tumble 40% in four trading days after Ackman last week accused the company of operating as a pyramid scheme.

Hiring a financial planner isn't just for the wealthy anymore. Regular investors also can get reasonably priced help, business reporter Walter Hamilton writes in The Times' Mutual Fund Quarterly Report. As a legion of do-it-yourself investors gets older and their portfolios grow larger, many people find they need guidance from a financial planner. Fortunately, investment advice doesn't have to break the bank. You can turn to online-brokerage and mutual fund companies, fee-only financial planners, and even from an emerging crop of websites popping up on the Internet.

NEW YORK - Zambia may not seem like the hottest investment out there. Disease, unemployment and poverty threaten its 14 million people in the small sub-Saharan nation. Zambia also faces an electricity shortage, while its roads and train system fall apart. And the country depends heavily on copper mining to fuel any economic growth. Yet when Zambia debuted bonds on the market last month, it wound up selling $750 million worth of fixed-income securities to investors - 50% more than originally planned.

Re "Private-equity shenanigans," Editorial, Sept. 6 The kind of tax manipulation you talk about may require changes to the tax code. But the common beliefs that capital gains are only for the rich and that taxes on them only affect the rich are folly. To increase capital gains (and dividends, for that matter) across the board would have huge affects on the middle class as well. Mutual funds, 401(k) plans and other investment plans have trillions of dollars invested by the average worker.

An unsuccessful effort to tighten rules for money-market mutual funds raises an unpleasant issue for the millions of investors who rely on the funds. Should investors keep billions of dollars in a low-yielding investment that could be far riskier than it seems? The head of the Securities and Exchange Commission was forced to scrap a plan to revamp the structure and inner workings of money-market mutual funds after failing to garner enough support for the plan. SEC Chairwoman Mary L. Schapiro had argued that money-market funds are vulnerable to losses during financial panics, which could cause investors to lose money.

The U.S. stock market in 2006 had its best year since 2003, but it was a challenging year for many stock mutual funds. The Times' annual fund review will appear in the Business section Monday. It will include tables showing how 5,400 stock and bond funds performed in the fourth quarter, all of 2006, and the last three years, and listings of the top-performing funds for the year in more than 50 major categories. The report also will include articles providing review and outlook.

The Securities and Exchange Commission has declined to impose new regulations on money market mutual funds, which were exposed as vulnerable during the 2008 financial crisis. Panicked investors withdrew more than $300 million from the funds in one week in September 2008. This cast doubt on the security of the funds, which are not insured. SEC Chairwoman Mary L. Schapiro had lobbied for new regulations that would require the funds to keep cash reserves to cover large redemptions, and to let their prices fluctuate like other mutual funds.

The appeal of target-date mutual funds is their exposure to so many parts of the financial markets. It's also what caused target funds to lose money in the second quarter. The average target fund lost 2.8% from April to June, dragged down by the nearly 7% loss in their non-U.S. stock holdings, according to Ibbotson Associates. That was a reversal from their 9% rally in the first quarter. Target funds are now down over the past 12 months, with the average fund off 0.5%. That's also driven by non-U.S.