INVESTING Safe havens still have an appeal
Experts say investors need to focus on the long term, not short-term gains.
NEW YORK (AP) -- Throughout Wall Street's three-year decline, three fund sectors -- gold, real-estate and so-called bear market funds -- have been a safe haven for investors, providing solid returns that offset some of the overall market's losses. The popular wisdom is that these funds have the best of their gains behind them, but some analysts say it's not too late to buy into them.
With the economy still sputtering and the possibility of war with Iraq depressing the market, safe havens, or defensive sectors, still appeal to many investors.
"A year ago, I thought gold had run out of steam, and I was wrong. So, there is always upside potential in these defensive-minded investments," said Jeff Tjornehoj, an analyst with fund tracker Lipper Inc. "With so much up in the air, I see some continued decent returns."
Word of caution
Still, investors should also be careful, because these sectors can be volatile and the funds within them are often expensive, carrying expense ratios of 2 percent or more. And, there is a risk in focusing too much on stellar past performance, which doesn't guarantee that future returns will be just as stunning.
"On the positive side, obviously you have the very high returns that these funds posted last year, but investors always need to be careful about chasing performance. And, gold and the gold funds are highly volatile," said Lynn Russell, a metals analyst at Morningstar, another fund research company. "I would warn against investors rushing to chase performance given high [fund] prices and high volatility in this category."
Russell said investors should also be wary of gold funds because the metal itself is trading at six-year highs.
It's easy to see why these three funds varieties -- gold, bear market and real estate -- are attractive. Of the 41 equity fund categories tracked by Lipper, only these three ended last year with positive returns: gold funds with a return of 63.3 percent; specialty diversified funds, which use techniques that work well in a bear market, with a return of 10.2 percent; and real-estate funds, returning 4.2 percent.
Gold funds have enjoyed by far the best performance, beating out all other types of stock funds throughout the bear period. Gold funds have an annualized two-year return of 39.1 percent, an annualized three-year return of 21.7 and an annualized five-year return of 7.5 percent, according to Lipper.
And, so far this year, gold funds have a return of 1.4 percent, second only to China region funds with a return of 5 percent, according to Lipper. All other fund varieties have posted negative returns so far for 2003.
Aside from gold and China region funds, specialty diversified equity funds are the only group with a positive return so far for the year. According to Lipper, these funds have a return of 0.7 percent, largely attributable to so-called bear funds. Bear fund managers follow strategies that are rewarded when the market falls; that accounts for their two-year annualized return of 10.4 percent and a three-year annualized return of 8.9 percent.
While real-estate funds have a negative return of 2.4 percent so far this year, they have an annualized three-year return of 11.6 percent, according to Lipper.
Investors should be cautious, choosing to invest in these categories based on their long-term objectives rather than hopes for big short-term gains, fund experts said.
Tjornehoj said investors should be particularly careful when it comes to investing in bear market funds, which run counter to the market and, which, like other sector-specific funds, have high fees. They also tend to have large tax bills as managers make frequent trades and accumulate short-term capital gains.
Holding on to a bear fund can be a problem when the market goes up; at that point these funds become a drag on the rest of investors' portfolios.
But investors might want to always have a portion -- however small -- of their portfolios dedicated to the gold and real-estate sectors as a hedge against future bear markets.
"You want 5 percent to as much as 15 percent of your investable assets in these defensive-minded investments like gold and real estate," said Lipper's Tjornehoj.
Russell at Morningstar said the amount should not exceed 5 percent.