And the Winner Is: Mr. Slowpoke
Growth-and-income funds hit the finish line
NEW YORK — A record-breaking stock market sometimes brings record-breaking pressure to pick a mutual fund that keeps pace, but the winning strategy often lies elsewhere.
Sometimes the best way to win, especially when the race gets frantic, is to saddle up the tortoise - a performer that lacks the razzle-dazzle but crosses the finish line time after time.
If that rings true, growth-and-income funds belong in your mutual fund stable.
Long considered the plain vanilla enterprises of mutual funds, they bring respectable returns and impressive security.
"High-diddle-diddle, right down the middle," quips Michael Lipper, president of the financial data firm Lipper Analytical Services in New York.
"Growth-and-income funds tend to be less extreme, they have lower risk ... and they do quite well over time," says Mr. Lipper
But with their investments in blue-chip companies, these conservative funds mean rich rewards in the current bull market. They've gained more than 14 percent a year for the past five years, according to the Value Line Mutual Fund Survey.
And in any market climate, these war-horses of the industry should make up the core of a typical retirement portfolio, many experts say.
Investors are clearly infatuated.
Since 1984, the growth-and-income category has consistently ranked No. 1 or No. 2 at the equity-fund box office, in terms of new investor dollars.
The attraction stems in part from the popularity of funds that track the Standard & Poor's 500 stock index. Growth-and-income funds, including S&P index funds, won the new-money race in 1987, 1989, 1992, 1993, 1995, and 1996, according to industry statistics. And they have a good shot at the top this year.
Growth-and-income funds have two goals: growth in share-price and regular income checks for their investors. They invest mainly in shares of large companies with steady profit gains and consistent dividend payments. Often a portion of the portfolio includes bonds.
For most investors, G&I funds "are the most comforting category of mutual funds," says Sheldon Jacobs of the No-Load Fund Investor in New York.
If you want something more conservative, you have to go "with a bond fund or a money-market account."
Many G&I funds now invest heavily in bonds, Mr. Jacobs says. The average allocation: 87 percent equity (stocks) and 13 percent bonds. By contrast, growth funds, which stress increasing share price without regard to income, are about 97 percent equity; and aggressive-growth funds, (which often invest in small companies), are about 99 percent equity.
In looking for a good growth-and-income fund, experts give these tips:
1. Find the best track record. Future returns may not exceed past performance, historical perspective is important.
2. Investigate the "income" side. Does it stem largely from bonds or stocks? Bonds can sour if rates rise, but blue-chip companies seldom cut dividends.
3. If a G&I fund outperforms its peers, find out why. High performance from risky investments may juice-up returns one year, but might not last the race. A phone call to the fund company can produce that information.
Many of the best-known funds are growth-and-income, including:
* Fidelity Fund (800-544-8888), up 13.15 percent this year, through June 6.
* Fidelity Growth & Income Fund (800-544-8888), up 13.63 percent.
* Neuberger & Berman Guardian Fund (800-877-9700), up 12.39 percent.
* Pioneer Fund (800-225-6292), up 16.92 percent.
* Vanguard 500 Index Fund (800-662-7447) up 16.7 percent.
* Vanguard Windsor Fund (800-662-7447), up 13.8 percent.
But the biggest aren't necessarily the best, financial advisers say. Some of those with the best performance records are shown in the accompanying chart.
G&I funds make up one of three branches of what are called "total return funds," with gains coming from a mix of capital appreciation and steady income.
The other two branches are equity-income and balanced funds. Equity-income funds are a little less conservative than G&Is. They look for stocks that pay high dividends. Balanced funds are more conservative, typically 60 percent stocks, 40 percent bonds.
G&I funds tend to slightly outperform the other two branches, according to studies by Morningstar, the fund tracking company in Chicago.
There is, however, a downside.
When the market rages, particularly in the early stages of an upswing, aggressive-growth funds often provide better returns.
And some analysts believe many blue-chip companies, G&I staples, are overvalued today - a risk if the market slumps.