IT’S January, and that means it’s time for employees at companies across America to make investment decisions about their 401(k) plans.
Inevitably, many of these employees will turn to Morningstar, the mutual fund rating firm, for help in evaluating their choices.
I decided to go one step further and to find out which funds are available in to Morningstar employees in their 401(k) plan.
Clearly, the people who work at Morningstar are meant to be more knowledgeable about fund investing than the average American and thus must offer better choices in their retirement plan.
Right?
Not exactly.
Morningstar willingly handed over the list, and I was surprised — despite last year’s market meltdown — how many of the choices would have lost its employees money in 2000. Morningstar gives its employees 14 choices, excepting bond and money market funds, and only six of them posted gains last year.
Over longer periods of time, the funds on Morningstar’s 401(k) list are quite strong.
Here’s the list, in alphabetical order, together with my own analysis of each fund:
* Brandywine fund. This no-load portfolio emphasizes the long-term appreciation of capital by purchasing a mix of growth and value stocks from the U.S. and overseas. Last year, it gained 7.1 percent by owning positions in companies such Nokia, Advanced Micro Devices and LSI Logic. Its average annual gain for the last five years was 18.68 percent. Morningstar gives it four stars out of five.
* Domini Social Equity. This is the fund for tree-huggers. It is one of those socially responsible portfolios that doesn’t invest in companies that pollute or employ child laborers or engage in any other so-called “sins.” Last year, it lost 15.05 percent, in part because of its big positions in technology bellwether stocks such as Cisco, Intel and Microsoft. Over the last five years, it’s averaged an annual gain of 18.77 percent. There is no load. Morningstar gives it four stars.
* Fidelity Low-Priced Stock. This is an excellent choice for a 401(k) plan. This fund is closed to all new investors, except for those who get in through a 401(k) plan. And the usual 3 percent load is waived for 401(k) investors. What’s more, the track record is great. The fund gained 18.83 percent in 2000, and has an average annual gain of 15.36 percent over the last five years. Some of its big holdings last year were Quest Diagnostics, Universal Health Services and Gallaher Group. Morningstar gives it only four stars, which makes me wonder what more it has to do to get a five-star rating.
* Gabelli Asset fund. This no-load value-oriented portfolio strives to earn a 10 percent rate of return annually, a goal that has thus far eluded it. Last year, the fund lost 2.37 percent, thanks to investments in AT&T, Ralston-Purina and Neiman-
Marcus. In 1999, however, the fund overreached its goal when it gained 28.49 percent. For the last five years, it posted an average annual gain of 18.59 percent. Morningstar gives it four stars.
* Harbor Capital Appreciation. This is a no-
load large-cap growth fund and, like others in that category, lost money last year. For 2000, the fund was down 17 percent, but for the last five years, it’s been up, on average, 23.21 percent per year. It’s the kind of fund that holds a diversified portfolio of the world’s biggest companies, including Citigroup, Home Depot, Cisco and Nokia. It’s the first five-star fund on Morningstar’s own list.
* Oakmark Select fund. This no-load fund seeks long-term capital appreciation but does not attempt a diversified portfolio. For example, the fund recently held only 15 stocks, including huge positions in companies such as Washington Mutual and Toys “R” Us, though it also has a large number of mid-cap holdings. In 2000, it gained 25.3 percent. For the last three years, it averaged an annual gain of 21.87 percent. Morningstar gives it four stars.
* MAS Mid-Cap Growth. This no-load fund lost ground in 2000, dumping 7.57 percent of its value, thanks to investments in technology companies including Mercury Interactive, Rational Software and Exodus Communications. Still, Morningstar gives it five stars, and it is said to be one of the most popular funds in the firm’s 401(k) plan.
* Morgan Stanley Dean Witter Institutional U.S. Real Estate. This no-load fund took advantage of its focus on one of the hottest sectors in the market last year to turn in a fantastic gain of 29.36 percent, best of any fund available in Morningstar’s 401(k) plan. It does not, however, have the greatest long-term record, with a paltry 3.93 percent annualized gain for the last three years. Morningstar gives it two stars.
* Selected American Shares. This growth and income fund features no load and strong performance. While the portfolio gained only 9.33 percent in 2000, that was enough to beat the major market indices. During the year, the fund had big positions in some of the market’s biggest winners and biggest losers. Top holdings have included American Express, Hewlett-Packard, Citigroup and McDonald’s. Over the last five years, it averaged a gain of 22.82 percent per year. Morningstar gives it five stars.
* Templeton Developing Markets. This fund suffers from being the biggest loser among the Morningstar 401(k) choices last year, having dumped 32.36 percent. And it adds insult to injury, charging a 1 percent load for most investors, though that fee is waived for 401(k) shareholders. Over the last five years, it’s lost 1.84 percent on average each year. By mission, the fund invests at least 65 percent of its assets in companies that are headquartered in developing markets suc as Mexico, Korea and Argentina. That has not been a strong sector of the market in recent years. Morningstar gives it two stars.
* T. Rowe Price Small-
Cap Stock. This, like the Fidelity Low-Priced Stock fund, was a good choice in 2000. It gained 16.49 percent, thanks to investments in little-known companies such as Harman International, Cleco and Downey Financial. Over the last five years, it posted an average annual gain of 14.72 percent. Morningstar gives it four stars.
* Vanguard 500 Index. This is one of three Vanguard choices for Morningstar employees. It, like all Vanguard funds, is available without paying a load. All three of the Vanguard funds are quite popular in other companies’ 401(k) plans, as well. This one, the biggest fund in the world, simply aims to emulate the returns of the S&P 500 index. As that index lost ground last year, so did the fund, posting a loss of 9.06 percent. Over the last five years, it gained, on average 18.84 percent, explaining why it is the most popular fund in Morningstar’s 401(k) plan. Morningstar gives it four stars.
* Vanguard Lifestrategy Growth. This fund of funds buys shares in other Vanguard funds to get a mix of growth and income. It also usually has a small position in bonds, no more than 20 percent. The fund lost 5.44 percent last year, and has an average annual gain of 11.98 percent over the last five years. Morningstar gives it three stars.
* Vanguard International Growth. This global growth fund diversifies its assets among companies headquartered in as many as 30 different countries. It lost 8.6 percent last year when it held big positions in Vodafone, Philips Electronics and Vivendi Universal. But over the longer term of the last five years, the fund averaged an annual gain of 9.38 percent. Morningstar gives it three stars.
* Please send e-mail to:[email protected]
If you worked at Morningstar . . .
. . . here’s how your 401(k) would have fared last year:
Fund 2000 return
Brandywine +7.10%
Domini Social Equity -15.05
Fidelity Low-Priced Stock +18.83
Gabelli Asset -2.37
Harbor Capital Appreciation -17.00
MAS Mid-Cap Growth -7.57
MSDW Inst. U.S. Real Estate +29.36
Oakmark Select +25.30
Selected American Shares +9.33
Templeton Developing Markets -32.36
T. Rowe Price Small Cap Stock +16.49
Vanguard 500 Index -9.06
Vanguard International Growth -8.60
Vanguard Lifestrategy Growth -5.44