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Got money to invest? Seek funds that hold up in good, bad times

You don't feel particularly thankful this year. That investment property in Baghdad just isn't working out. You discovered that tigers make really poor pets. And your mutual fund manager has been arrested for knocking over a convenience store.

But that doesn't mean there's nothing to give thanks for. The average stock mutual fund has gained 24% this year, vs. 19% for the Standard & Poor's 500 stock index. The economy is improving. And despite the widening mutual fund trading scandal, there are a few good funds out there. Probably.

The strong stock market and the soaring economy are luring many investors back into the market, despite the mutual fund scandal. Investors poured an estimated $24 billion into stock funds in October, even while they yanked money from scandal-tarnished funds.

It makes sense. The stock market's gains reflect a robust economy. Low mortgage rates set off a wave of home refinancing. Investors took a look at their mortgage savings and hit the malls.

A massive tax cut, which sent $500 checks to many taxpayers, also kept the registers humming. Together, low rates and tax cuts were the economic equivalent of filling a soda bottle with a fire hose. Gross domestic product — the value of the nation's goods and services — shot up 8.2% the third quarter. Corporate profits rose 11.8%.

The rush to stock mutual funds makes sense for another reason: Funds are still the investment of choice for most people.

Sure, picking individual stocks is always tempting. But Wall Street has already bid up prices. Intel is up 58% the past 12 months. Sears is up 101%. Best Buy has soared 118%. "Bargains are a bit more difficult to find than they were last year," says Tim Evnin, co-manager of Excelsior Value & Restructuring. You may prefer to invest via stock funds.

If you're going to invest now, you should look for funds that can weather good markets and bad — and ones that haven't been tainted by the mutual fund trading scandal.

Start by looking at performance. Good performance is no guarantee that a fund will do well in the future. But rotten performance does tend to persist, so let's throw out funds with below-average results the past 12 months, three years, five years and 10 years. Now you've whittled the universe of 5,900 stock funds down to 81.

Normally, 12 months is much too short a time period. But we're looking for funds that fare well in bull markets, and the current bull market is just over 12 months old.

It also makes sense to look for funds that hold up better than their peers in a bear market. Morningstar, the Chicago investment trackers, has a useful tool called the bear market ranking. Morningstar looks at all months in which the S&P 500 has lost more than 3%. Funds that rank above 50% fare better in bear markets than those that rank below 50%. Let's include only funds with above-average bear market rankings. Now we're down to 31 funds.

Experienced managers weather bad markets a bit better. In 2002, the average domestic stock fund in the Morningstar database fell 21.3%. Those with the same manager at the helm for five years fell 20.2%. The funds with the same manager for 10 years fell 18.9%. Let's use funds whose managers had been on the job for at least five years. That cuts the list to 29.

Finally, look for low expenses. Even the best managers have a tough time beating the S&P 500. Beating the S&P 500 by 1.5 percentage points a year — the typical expense ratio for stock funds — is even tougher. Stock funds whose total annual expenses were less than 1% of assets a year have gained an average 9.4% a year the past decade. Those with higher expenses averaged 8.5%.

Kicking out funds with expenses higher than 1% a year slashes the list to 16 funds. The 10 top performers are in the chart.

Interestingly, none of them has been touched by the mutual fund scandal so far. This may be coincidence, and, because the investigation is ongoing, we can't guarantee that these funds will remain unscathed. But at least so far, they have given their shareholders something to be thankful for.

John Waggoner's column appears Fridays. E-mail: jwaggoner@usatoday.com

Copyright 2003, USA TODAY, Reprinted with permission.

Information related to the above USA TODAY column by John Waggoner

The Investing column above, by John Waggoner, was printed in USA TODAY on November 28, 2003.  It is included on this Pearl Mutual Funds Website by permission of USA Today.  The statements, opinions, and investment advice in this column are those of John Waggoner, who has no connection with Pearl Mutual Funds.  Pearl Mutual Funds and Pearl Management Company, the Funds’ Manager, cannot guarantee the accuracy or completeness of any statement, opinion, investment advice, or numerical data in this column. 

Pearl Mutual Funds, including Pearl Total Return Fund and Pearl Aggressive Growth Fund, are described in a Prospectus which contains more complete information, including fees and expenses.  Please read the Prospectus carefully before investing or sending money.  You can request a Prospectus by calling toll-free 866-747-9030, or you can download and read it on the Prospectus page of this Website. 

Shares of both Pearl Funds are available to persons residing in 30 states and the District of Columbia.  The column above (and anything on this Website) is not an offer of or a solicitation of an offer to buy either Fund, nor shall either Fund be offered or sold to any person, in any jurisdiction in which the offer, solicitation, purchase, or sale would be unlawful under its securities law.  The Funds are offered only to residents of the United States.

Pearl Total Return Fund seeks long-term total return for investors.  Pearl Aggressive Growth Fund seeks long-term aggressive growth of capital.  Each is a diversified fund of funds that invests in shares of other registered investment companies.  Each Fund’s portfolio holdings and related information will change over time. 

Both Pearl Funds are no-load.  This means an investor does not pay a commission, sales charge, or redemption fee.  In addition, both Funds seek to make all their investments on a no-load basis.  Pearl Total Return Fund has not paid any commission, sales charge, or redemption fee since 1998.  Pearl Aggressive Growth Fund has never paid any commission, sales charge, or redemption fee.

Both Pearl Funds do not impose any 12b-1 fee.  Some of the mutual funds in which the Funds may invest may impose a 12b-1 fee. 

Limits on expenses.  Pearl Management Company, the Funds’ Manager, has contractually agreed to reimburse each Pearl Fund for all ordinary operating expenses (including management and administrative fees) exceeding these expense ratios: 0.98% of a Fund's average net assets up to $100 million and 0.78% in excess of $100 million. 

The Manager’s reimbursement of expenses that exceed the expense limit lowers the expense ratio and increases the overall return to investors. 

Performance is historical and does not guarantee future results.  Investment return and principal value of an investment in each Pearl Fund will fluctuate, so that an investor’s shares in the Fund, when redeemed, may be worth more or less than their original cost.  Performance changes over time and is likely to be materially different by the time the column above is read.  For recent performance information, go to the home page and each Fund’s Performance page on this Website or call toll-free 866-747-9030.   

All investments involve risk.  Even though Pearl Total Return Fund and Pearl Aggressive Growth Fund each invest in many mutual funds, that investment strategy cannot eliminate risk.

Please consult your tax advisor regarding the tax consequences of owning shares of the Funds in your particular circumstances.

From July 1, 1972 through July 1, 2001, Pearl Total Return Fund’s shares were not registered under the Securities Act of 1933 and only private sales were made.  The Fund began offering its shares to the public pursuant to an effective registration statement on July 2, 2001.  Pearl Aggressive Growth Fund began operations on July 2, 2001. 

The Standard & Poor’s (S&P) 500 Index is an unmanaged index of 500 stocks that is market-capitalization weighted and is generally representative of the performance of larger companies in the U.S.  You cannot invest directly in an index.

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