The international encyclopedia of mutual funds closed end funds and REITs

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The International
Encyclopedia of
Mutual Funds,
Closed-End Funds and
Real Estate Investment
Trusts
Peter W. Madlem
Thomas K. Sykes

|J Routledge
Taylor &. Francis Group
LONDON AND NEW YORK

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First published 2000 by
The Glenlake Publishing Company, Ltd.
Published 2013 by Routledge
2 Park Square, Milton Park, Abingdon, Oxon 0X 14 4RN
711 Third Avenue, New York, NY, 10017, USA

Routledge is an imprint o f the Taylor & Francis Group, an informa
business
© 2000 The Glenlake Publishing Company, Ltd.

All rights reserved. No part of this book may be reproduced in any form or by
any means electronic, mechanical, photocopying, recording, or otherwise with­

out the prior written permission of the publisher.

ISBN 13: 978-1-579-58086-5 (hbk)

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A B O U T THE A U T H O R S

Peter W. Madlem has over 15 years of experience in investment research
and management. He has been a registered investment advisor and presi­
dent of his own publishing and investment advisory companies. He is cur­
rently a portfolio manager with Santa Barbara Bank & Trust.
A published author, he has written five books and numerous articles
on investment topics. His comments and insights have appeared in the
pages of many leading financial newspapers and magazines including the
New York Times, Wall Street Journal, Investor’s Business Daily, Los
Angeles Times, Money Magazine, and Kiplinger’s Personal Finance.
Mr. Madlem is also a published and recorded classical composer
whose works are heard in concert halls around the world and are avail­
able on Sony/Classical and Sonora Records.
Thomas K. Sykes is a financial analyst with the investment management
deparment of Santa Barbara Bank & Trust. He is also a database devel­
oper for numerous companies in Santa Barbara, California.

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TABLE

OF C O N T E N T S

Section I MUTUAL FUNDS ................................................................. 1
WHAT IS A MUTUAL F U N D ?............................................................... 1
HOW TO INVEST IN A MUTUAL F U N D ...........................................4
HOW A MUTUAL FUND O PER A TES................................................. 6
CATEGORIES OF MUTUAL F U N D S ....................................................7
Diversified Common Stock Companies ...........................................7
Aggressive Growth F u n d s............................................................ 7
Emerging Market F u n d s ...............................................................8
Europe Stock F u n d s ..................................................................... 9
Foreign Stock F u n d s..................................................................... 9
Growth Stock F u n d s ................................................................... 10
Pacific Stock Funds ................................................................... 10
Small Company Funds ............................................................... 10
World Stock Funds ......................................................................11
Balanced Com panies.......................................................................... 11
Asset Allocation F u n d s ............................................................... 11
Balanced Funds .......................................................................... 12
Growth and Income F u n d s ........................................................ 13
Income C om panies............................................................................ 14
Equity-Income F u n d s ................................................................. 14
Multi-Asset Global F u n d s ...........................................................15
Specialized Com panies......................................................................15
Bond and Preferred Stock C om panies............................................. 15

Convertible Bonds ......................................................................16
Corporate Bonds—General ...................................................... 16
Corporate Bonds—High Q uality................................................17
Corporate Bonds—High Yield.................................................... 17
Government Bonds—Adjustable Rate M o rtg a g e .....................18

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Government Bonds— G en era l....................................................18
Government Bonds—M o rtgage..................................................19
Government Bonds—Treasury ..................................................19
Multi-Sector B o n d s......................................................................19
Municipal Bonds ........................................................................19
Short-Term World Income Bonds .............................................20
World B o n d s................................................................................ 20
MUTUAL FUND TABLE K E Y .............................................................20
MUTUAL FUND TABLE ..................................................................... 24
Section II CLOSED-END FUNDS ................................................. 235
WHAT IS A CLOSED-END FUND? ................................................. 235
Diversifiied versus Non-Diversified Closed-End F u n d s..............237
Fees and E x p e n se s................................................................... 237
HOW TO PURCHASE A CLOSED-END F U N D ............................. 237
Items to Consider when Buying a Closed-End F u n d .................. 237
REGULATION....................................................................................... 238
DISCOUNTS ..........................................................................................238
How to Calculate the Discount or Premium ................................240
RIGHTS OFFERINGS ..........................................................................241
CLOSED-END FUND CATEGORIES ............................................... 242
Bond Funds ..................................................................................... 243

Corporate Bond Funds— G en era l...........................................244
Corporate Bond Funds—High Y ie ld ...................................... 244
Income F u n d s ............................................................................ 245
International Bond F u n d s ........................................................ 245
Multi-Sector Bond Funds ........................................................ 246
Municipal Bond Funds—N ational...........................................246
Municipal Bond Funds—Single State .................................... 247
U.S. Government Bond F u n d s................................................. 247
Equity Funds ...................................................................................247
Convertible Funds ................................................................... 248
Domestic Equity F u n d s.............................................................249
Single Country Equity Funds ................................................. 249
World Equity Funds ................................................................. 250
CLOSED-END FUND TABLE KEY ................................................. 250
CLOSED-END FUND TA B LE.............................................................254

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Section III REAL ESTATE INVESTMENT TRUSTS (REITs) .283
WHAT IS A REAL ESTATE INVESTMENT TRUST (REIT)? . . .283
H ISTO R Y ................................................................................................ 287
THE MODERN R E IT ............................................................................288
REIT M anagem ent..........................................................................288
HOW TO INVEST IN A R E IT ............................................................ 288
Funds From Operations................................................................... 289
Share P r ic e ....................................................................................... 289
REIT CATEGORIES ............................................................................289
Property T y p e ...................................................................................290
Geographic F o c u s............................................................................290

THE U P R E IT ......................................................................................... 290
THE D ow nR EIT.....................................................................................291
REIT TABLE K E Y ................................................................................ 291
REIT T A B L E ......................................................................................... 294
INDEX OF MUTUAL FUNDS, CLOSED-END FUNDS, AND
REITs .....................................................................................................307

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Section I
M U T U A L FUNDS

The most extraordinary financial development in the last half of the twen­
tieth century has been the growth and development of the Investment
Company. Investment companies, or mutualfunds, currently number over
8,000 in the U.S. alone. That’s over three times more than all the stocks
trading on the New York Stock Exchange (NYSE). The mutual fund
industry is now the second largest financial institution in the nation, with
assets approaching $4 trillion, up from $1 trillion in 1991. Over the past
five years, the percentage of U.S. households that invest in mutual funds
has risen from 25 to 37 percent.
Investment companies have been in existence long before World War
II. Their origins can be traced back to the early traders of biblical times.
Mutual funds enjoyed considerable popularity in England and Scotland

beginning some 140 years ago. Many of these early British funds helped
the westward expansion in the United States by supplying capital to pur­
chase land and build railroads. In the U.S., early investment companies
known as investment trusts played a prominent role in the booming
1920s.
Many innovations have brought the modem mutual fund to its current
position as an important financial institution. Millions of people now con­
sider mutual funds in the same class as banks, savings and loans, and life
insurance as tools for the accumulation of wealth and financial planning.
Mutual funds are ideally suited for the smaller investor, but many
wealthy and institutional investors find investment companies can effec­
tively address particular investment issues and provide effective returns.

WHAT IS A MUTUAL FUND?
A mutual fund is an investment company, a corporation, or trust whose
sole business is to make investments on behalf of individuals and institu1

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2

Section I

tions sharing a common investment goal. A fund endeavors to do a better
job of investing participant funds and managing the investments than
individual investors could do for themselves.
The funds that form the mutual fund investment pool come in vary­
ing amounts from many different investors. The fund managers then use
the pool of money to buy a portfolio of stocks, bonds, or money market

securities intended to achieve the fund’s financial objectives.
While a mutual fund is simply one method of investing, many con­
sider them to be the best investment medium developed in the twentieth
century. There are an abundance of investment products, but none match
the flexibility and versatility of mutual funds. Mutual funds offer profes­
sional management, liquidity, ease of record keeping, diversification, and
lower risk—all in one investment package.
The investment objectives of mutual funds cover a wide range. There
are mutual funds to invest in all types of investments, including:
• common stocks;
• preferred stocks;
• corporate bonds;
• tax-free municipal bonds;
• U.S. Government obligations;
• zero-coupon bonds;
• convertible securities;
• gold and silver;
• foreign securities; and
• real estate.
A mutual fund’s investment objective, found in the prospectus, deter­
mines how fund assets are invested. Some seek higher returns by follow­
ing, risky aggressive investment strategies; others pursue current income
using more conservative investments. Management will rely on funda­
mental, macro- or micro-economic conditions and even technical analy­
sis to arrive at a suitable portfolio composition.
One major attraction of mutual funds is that there are many funds
offering the same investment strategy to select from. For example, an
individual needing high current income has a lot of bond funds to choose
from. An investor might even consider an equity fund and withdraw
funds on a systematic basis either monthly or quarterly. An investor desir­

Mutual Funds

3

ing growth in assets would look to the various stock funds ranging from
aggressive growth to growth and income or may even consider interna­
tional stock funds. An investor can also mix and match several mutual
funds in order to achieve some current income plus inflation protection
via bond and equity funds. Some mutual funds, called balanced or asset
allocation funds offer this ability internally
Performance figures for mutual funds are easily obtained. There are
many reputable sources—both in print and on-line.
Essentially, mutual funds are a single large investment account that is
owned by many individual investors who share its income, expenses,
profits, and losses, in proportion to their personal shares in the account.
Gains or losses in the fund are reflected in the share price and in share­
holder distributions of realized gains. Investors share in the benefits of the
company’s investment advisory and management services by owning
shares in the company. In this way, mutual funds allow the small investor
access to the same advantages and security that only the wealthy and
large institutions could previously afford.
As a fund earns money, it is distributed to shareholders. Earnings
come from interest on bonds, dividends paid by stocks, and gains from
the sale of securities in the fund’s portfolio. Each investor receives paidout dividends and capital gains in proportion to the number of fund shares
owned. In this way a shareholder with a few hundred dollars invested will
get the same investment return per dollar as those who invest thousands.
The growing popularity of mutual funds is due in large part to their
their democratic nature. They allow all investors—from large to small—

to easily invest in a variety of opportunites with convenience and effi­
ciency. Ownership in large and expensive blue-chip companies (e.g.,
Microsoft and General Electric) is accessible to all investors.
Mutual funds have also opened up foreign stock and bond markets.
Emerging markets as well as more established foreign markets are now as
easy to invest in as domestic securities.
Investors seeking fixed income are also well served by the modem
mutual fund industry. Now longer are such investors restricted to pass
book savings accounts, Certificates of Deposit (CDs) or savings bonds.
Bond or fixed-income mutual funds allow shareholders to invest in vary­
ing interest paying securities from U.S. Treasuries bonds to collateralized
mortgage obligations (CMOs), adjustable-rate preferred stock, floatingrate notes and even to other countries debts, denominated both in U.S.
dollars an in other currencies.


4

Section I

HOW TO INVEST IN A MUTUAL FUND
Investing in a mutual fund is like buying shares in the stock of any large
corporation. All an investor has to do is purchase the fund’s shares.
Instead of owning an interest in one company, mutual fund investors are
buying shares in a company owning the shares of other companies. The
price of the mutual fund’s shares is based on the value of all the securi­
ties that it owns.
Mutual funds continually issue new shares for purchase by investors.
The issuance of new shares does not dilute the holdings of current share­
holders since each new share created is exactly equal to the amount of
money coming in to the fund to purchase it.

The value of a fund’s share changes daily depending upon the value
of the securities that it owns. Fund share price is called net asset value or
NAV. It’s calculated daily by taking the total value of all the fund’s invest­
ments at the end of the day, deducting any expenses, and then dividing
that number by the number of shares outstanding.
Better newspapers report mutual fund net asset values every day. An
example from the Investor's Business Daily is shown in Table 1.1.

Table 1.1: Net Asset Values, Tuesday, July 6,1999
36 Mo s.
Performance
Rank
Mutual Fund

1999
%
Chg

4 wk
%
Chg

5 Yr
After
Tax Rtn

Net
Asset
Value

NAV
Chg

- A AAL Mutual A $5.9 bl
Balanced b
DBond
A+
Capital Gr
C+
Equity Inc.
High Yield Bd
D
Inti
D+
Mid Cap Stk
DMuni Bd
Small Cap Stk
AAL Mutual B $154 mil
Balanced m
Capital Gr
Equity Inc b
High Yield Bd b
Inti b
Mid Cap Stk
Small Cap Stk

Source: Investor's Business Daily

+6
-3

+15
+9
-1
+9
+10
-2
0

+3
0
+6
+2
-1
+4
+5
-2
+6

+6
+14
+8
-2
+9
+9
-1

+3
+6
+2
-1

+4
+5
+6

+22
+211
+86

+122
+25

800-553-6319
12.28
9.65
37.56
15.01
8.61
11.67
15.37
11.07
11.73
800-553-6319
12.24
36.91
15.00
8.61
11.52
15.06
11.55

-.03
-.02
-.15

+.09
+.03
-.01
+.04
-.03
-.15

+.09
+.02
+.05


Mutual Funds

5

The first row is in bold face type and is the fund family name. This
row is followed by assets under management and the telephone number.
The next row begins with the IBD rating of the fund’s performance over
the last 36 months relative to all other mutual funds—A is the best, E is
the worst.
The next column in the row gives the fund name then the Year to Date
(YTD) percentage change, its four-week percentage change, and the fiveyear after tax return. The daily net asset value (NAV) follows and the last
line is the point change for the day in the NAV.
IBD supplies a complete footnote table called “How to read mutual
fund tables & graphs”. IBD has created one of the most investor-useful

databases available in any publication. The tables include fees charged
for 12b-l, redemption charges, and front-end loads. Funds that have per­
formed in the top two-percent are boldfaced.
Missing from IBD’s table is the offer price. However, these can be
found in the Wall Street Journal and in the business section of many
newspapers. Any difference between the net asset value and offering
price signifies that a fund charges a load. For example, if the offering
price is $20 and the net asset value (or bid) is $18.50, the sales charge is
$20 -$18.50 = $1.50.
Sales charges are usually expressed as a percentage of the offering
price. In our example:
$1.50/$20.00 = 7.50% of the offering price.
A fund’s prospectus must reveal all sales charges that are imposed.
Sales charges are discounted depending on how much is invested. The
dollar amount necessary to qualify for a discount is called a breakpoint.
Breakpoint schedules show exact dollar values and varies from fund to
fund. The first discount is generally offered with a $10,000 investment.
Table 1.2 shows a sample schedule of sales charges.
Table 1.2: Schedule of Front-End Fee Charges: An Example
Amount Invested
$0 - $24,999
$25,000 - $49,999
$50,000 - $99,999
$100,000 -$249,999
$250,000 - $499,999
$500,000 - $999,999
$1,000,000 and up

Fees
5.50%

5.25%
4.75%
3.75%
3.00%
2.00%
0.00%


6

Section I

According to our sample schedule, a fund purchase of up to $24,999
and investor pays a sales charge equal to 5.50 percent of the current offer­
ing price. If the purchase is $25,000 up to $49,999, the sales charge is
reduced to 5.25 percent of the current offering price. The greater the num­
ber of dollars invested the smaller the percentage sales charge.

HOW A MUTUAL FUND OPERATES
Mutual funds are owned by shareholders. However, day-to-day operation
of the fund is handled by a management company. Recall the IBD mutu­
al fund table. It began with the fund family. This is the management com­
pany that created the fund and will typically offer many other funds,
financial products, and financial services. A management company cus­
tomarily supplies fund investment advisory services.
The investment advisor supervises a fund’s securities portfolio. The
advisor is paid for its services by charging a fee based on the total value
of the fund’s assets. These fees vary, but usually fall around one-half of
one percent. The advisor hires a portfolio manager to handle each fund’s
investments. He or she may purchase stocks, bonds, or both depending on

the type of fund managed.
The money managers decide what to buy, when to buy it, and what
price to pay. They also determine when to sell or take profits. Money
managers use a variety of tools to come to their decisions. They usually
have a staff of analysts who research companies in specific industries that
the fund owns, or might be interested in owning.
Analysts look at a company’s accounting reports, including the bal­
ance sheet, income statements, and statement of cash flows. They also
consider general economic and market trends and utilize the additional
resources supplied by economic and statistical data sources. On the basis
of their study, the money manager chooses what and when to buy, sell, or
hold for the fund’s portfolio, depending on the investment objective of the
fund.
In addition to the investment advisor, the management company can
also contract with an underwriter who establishes the distribution net­
work that allow the fund’s shares to reach the investing public. The
underwriter may sell fund shares to securities dealers as a wholesaler, or
it may sell retail directly to the public.
This Encyclopedia classifies mutual funds in six broad investment
categories:


Mutual Funds

7

1. Diversified Common Stock Companies
2. Balanced Companies
3. Income Companies
4. Specialized Companies

5. Bonds
6. Preferred Stock Companies

CATEGORIES OF MUTUAL FUNDS
Diversified Common Stock Companies
Diversified common stock companies have eight component fund types:
1. Aggressive Growth Funds
2. Emerging Market Funds
3. Europe Stock Funds
4. Foreign Stock Funds
5. Growth Stock Funds
6. Pacific Stock Funds
7. Small Company Funds
8. World Stock Funds
Diversified common stock companies comprise a large percentage of
mutual funds. These companies invest their assets in a portfolio of com­
mon stocks in a wide variety of industries. Their primary objective is
appreciation of capital while income is of secondary importance.
Objectives range from conservative to highly aggressive strategies.
Diversified common stock fund performance is more volatile than any
other fund types.

Aggressive Growth Funds
Aggressive growth funds seek maximum capital gains. Dividends or
income are not a relevant factor. Many of these funds can use leverage to
increase positions as well as utilize stock options and futures contracts.
Typically, these strategies comprise a very small portion of portfolio
holdings.

Section I

8

Aggressive funds deliver superior results during strong markets and
second-rate results during bad markets. This is characterized by their high
Betas of 1.2. This means they are 20 percent more volatile than the S&P
500 which, as the benchmark, always has a beta of 1.0. The typical priceeamings (P/E) ratio for stocks in aggressive fund portfolios is 37, approx­
imately 14 percent higher than S&P 500 stocks that have an average P/E
ratio of 33.
Aggressive growth funds have an average standard deviation of 28
which means returns can fluctuate up or down 28 percent around the
mean in any year. One good characteristic of the stock market is that the
longer a security is held the lower the volatility of returns. Therefore,
aggressive funds should be owned either as part of a broader, diversified
portfolio, or by aggressive investors who can live with high share price
fluctuations.
For example, since returns for aggressive growth funds have aver­
aged 14.95 percent over the past three years, annual returns can be
expected to range from +42.95 on the upside (14.95 + 28.00) to -13.05
(14.95 - 28.00) on the downside. This margin represents one standard
deviation. Once standard deviation shows the range of returns you can
expect 67 percent of the time or roughly two out of every three years.
At the time of this writing, the top ten holdings of aggressive growth
funds included:
Company
Veritas Software
Insight Enterprises
Heftel Broadcasting Class A
Vitesse Semiconductor

SunGard Data Systems
Symbol Technologies
CSG Systems International
Affiliated Computer Services A
Henry Schein
Helen of Troy

Sector
Technology
Retail
Services
Technology
Technology
Technology
Technology
Services
Health
Consumer Durables

Aggressive growth fund holdings are dominated by technology rep­
resenting over 50 percent of the average fund’s portfolio.

Emerging Market Funds
This category invests in stock issued by companies in emerging markets
on a worldwide basis. They are typically not concentrated in any one


Mutual Funds

9

country or sector. Instead they tend to favor broad diversification. The
category’s standard deviation is high at 26, while beta score is 1.26, con­
siderably higher, as would be expected, than the S&P 500 index. These
funds are primarily suitable for diversification efforts in a larger portfolio
construct.

Europe Stock Funds
These funds invest a majority of their assets in the equity securities of
companies based in Europe. The companies are generally large-cap,
established representatives of a broad range of industries. Risk levels, as
measured by the average fund beta is a very tame 0.60, or 40 percent
below that of our own domestic market. Standard deviation, at 18, is
eleven percent below domestic levels as well. These funds are particular­
ly appealing as the European Union motors ahead with the launch of the
unified currency, the Euro. The region still needs to address economic
issues of centralized government and high costs associated with a topheavy welfare state, but economic realities will force progress in these
areas.
Europe stock funds have the following historical annualized returns
for the trailing three-, five-, and ten-year periods:
3-years
20.35

5-years
15.92

10-years
11.36

Foreign Stock Funds

Foreign stock funds invest in equity securities of companies located out­
side of the United States. Currently, they number at approximately 270
funds. The rapid rate of global economic and social change has focused a
great deal of interest on this group. This fund category allows domestic
investors to invest around the world in a managed and diversified basis.
An important issue with investing outside the U.S. is the level of correla­
tion a foreign market has with the domestic market. The lower the corre­
lation, the better since diversification is based on the relationship between
different security performance characteristics. When one group of assets
goes down, a low correlation asset should go up. The average beta for this
group is 0.76, or about three-fourths the volatility of the S&P 500 index.
The average P/E ratio for this category, at 26, is also significantly lower
than the domestic average.
Foreign stock funds have the following historical annualized returns for
the trailing three-, five-, ten-, and fifteen-year periods:


10

Section I

3-years
8.57

5-years
6.36

10-years
8.54

15-years
12.88

Growth Stock Funds
Growth funds seek high capital appreciation with less risk than aggres­
sive growth funds. They are suitable for investors willing to accept mod­
erate levels of market risk in pursuit of higher than average capital gains.
Stocks are normally selected on the basis of an above average growth
potential over the longer term. They perform best in rising markets. The
average beta, or relative volatility of these funds ranges from 1.0 to 1.5
times that of the broader market.
Growth stock funds show the following historical annualized returns
for trailing three-, five-, ten-, and fifteen-year periods:
3-years
25.22

5-years
23.32

10-years
17.54

15-years
16.33

Pacific Stock Funds
Pacific stock funds invest in the equity securities of companies located in
countries throughout the Pacific Rim, including Japan, China, Hong
Kong, Malaysia, Singapore, New Zealand, and Australia. This is a wide
geographic region and, because many of these countries are emerging

economies, the funds tend to be very risky. At the time of this writing
these funds appear to be very cheap on a relative basis to the rest of the
world’s markets. Nimble investors who are bottom fishing can find a vari­
ety of candidates here.
Pacific stock funds have the following historical annualized returns
for the trailing three-, five-, ten-, and fifteen-year periods:
3-years
-12.09

5-years
-8.52

10-years
0.41

15-years
9.58

Small Company Funds
Small company stock funds are diversified common stock funds. They
are for the more aggressive investor as they specialize in the relatively
illiquid arena of small-capitalization companies. This type of company is
in the earlier stages of their life cycle.
Small-company stocks have an average P/E ratio of 27. The price
earnings ratio refers to the selling price of a stock in relation to its annu­
al earrings. Thus a fund category that has a p/e ratio of ten is comprised


Mutual Funds

11

of mutual funds whose typical stock in the portfolio is selling for ten
times what the corporation’s earnings are for the year. Small company
stock funds have a standard deviation of 25 percent and a beta of 1.01 per­
cent, figures that support the view that this category is slightly less
volatile than aggressive growth funds.
Small company stock funds have the following historical annualized
returns for the trailing three-, five-, ten-, and fifteen-year periods:
3-years
12.75

5-years
12.64

10-years
14.33

15-years
12.58

World Stock Funds
These funds seek capital appreciation by investing throughout the world.
That means they can invest in the equity securities of issuers located
throughout the world, including up to 50 percent in the United States.
World stock funds, at 18, have one of the lowest standard deviation scores
of any of the pure equity funds. The beta is 0.81, also below the domes­
tic equity index.
World Stock Funds have the following historical annualized returns
for the trailing three-, five-, ten-, and fifteen-year periods:

3-years
13.5

5-years
10.82

10-years
10.93

15-year
12.77

Balanced Companies
The next broad category of funds is the balanced companies. It consists
of three members:
1. Asset Allocation Funds
2. Balanced Funds
3. Growth and Income Funds

Asset Allocation Funds
Asset allocation funds have two dual goals, income and capital apprecia­
tion. Managers will use flexible approaches when combining stocks,
bonds, and cash. Assets will be shifted based on analysis of trends in the
business cycle. Like its balanced brethren, asset allocation funds provide
an income stream although the average yield is below three percent.

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12

Section I

Standard deviation and beta are both low at 11 percent and 0.59
respectively. Performance for asset allocation funds over the past three-,
five-, ten-, and fifteen-year periods is:
3-years
14.5

5-years
13.5

10-years
12.3

15-years
10.6

Balanced Funds
This category invests in equities and corporate bonds. Weightings
between the two are determined by the fund manager’s perception of cur­
rent and expected market conditions. If equity markets look strong, the
portfolio will be weighted higher in equities. The maximum equity allo­
cation is usually 75 percent of total assets since some fixed income expo­
sure is necessary for the fund’s objective. Similarly, no matter how bear­
ish the equity outlook may be, a balanced fund will seldom, if ever, allo­
cate more than 70 percent of its holdings to bonds. The fund’s prospectus
will describe allowable weighting ranges. These boundaries must be fol­
lowed at all time. Fund liquidity is supplied by cash equivalents (T-bills,
CDs, and commercial paper) or, possibly, small positions in preferred

stocks and convertible securities.
The standard deviation for balanced funds, at 12 percent, is less than
half the level of small company funds and aggressive growth funds. This
means the expected return for any given year will vary by 12 percent. For
example, if you were expecting an annualized return of 14 percent, your
actual return would range from 2 percent to 26 percent roughly two-thirds
of the time.
Performance for balanced funds over the past three-, five-, ten-, and
fifteen-years periods is:
3-years
15.12

5-years
13.32

10-years
12.54

15-years
12.84

The top ten holdings for balanced funds are evenly divided between
Treasury securities and the stock of core-type blue chip companies, as
follows:
Security Name
U.S. Treasury Note
U.S. Treasury Bond
U.S. Treasury Note
U.S. Treasury Note
Merck

7.5%
6.125%
5.625%
5.375%

Type/Sector
Bond
Bond
Bond
Bond
Health


Mutual Funds

13

General Electric
Microsoft
Walgreen
Cox Communications Cl A
American Inti Group

Industrial Cyclicals
Technology
Retail
Services
Financials

Growth and Income Funds
Growth and income funds seek capital growth and current income as
roughly equal objectives. Investments are selected for their potential price
appreciation and their high dividend-paying capabilities. These ftinds
aren’t trying to hit home runs, rather they seek a balanced investment
approach with the objective to create, over time, a rising level of income
through increased corporate earnings and dividends as well as growth in
value through capital appreciation. Investors in these funds are willing to
accept some fluctuation in income and market value of the investments
but the bonds do provide a good level of stability.
Risk scores are low with beta at 0.91 and standard deviation at 18.
This means these ftinds will tend to slightly under-perform the market
during bull markets and outperform during bear markets. The investor
can expect to have returns that move in a range of plus or minus 18 per­
cent from the average 67 percent of the time
Growth and income funds have the following historical annualized
returns for the trailing three-, five-, ten-, and fifteen-years:
3-years
15.12

5-years
13.32

10-years
12.54

15-years
12.84

The top ten holdings on an aggregate basis for Growth and Income

ftinds is as follows:
Security Name
General Electric
Exxon
IBM
Wal-Mart Stores
Schering-Plough
Vomado Realty Trust
Time Warner
Merck
Bristol-Myers Squibb
Microsoft

Sector
Industrial Cyclicals
Energy
Technology
Retail
Health
Financials
Services
Health
Health
Technology


14

Section I

Notice that these companies are blue-chip names recognized by any
investor. Vomado Realty Trust is a real estate investment trust (REIT) that
owns real estate and generates high yields through the collection of rent.

Income Companies
The next group of mutual funds is the Income Companies. These funds
include two categories:
1. Equity-Income Funds
2. Multi-Asset Global Funds

Equity-Income Funds
This category of Income Companies look for high current income by
investing at least 65 percent of their assets in dividend-paying equity
securities. Equity-income funds have average P/E ratios of 25, which is
well below the 33 for the S&P 500 index. These are typically considered
as value companies, companies with lower price-to-book and P/E ratios.
Standard deviation is also a low 16 compared to 20 for the S&P. Beta is
only three-quarters of the market average at 0.76.
The top-ten holdings of equity-income funds are:
Security Name
Abbott Laboratories
Longs Drug Stores
Montana Power
Alliance Capital Management
Union Planters
Atlantic Richfield
Bristol-Myers Squibb
AMR
Merck
Browning-Ferris Industries

Sector
Health
Retail
Utility
Financials
Financials
Energy
Health
Services
Health
Services

Financial, heath, and service companies comprise the bulk of these
portfolios. They are best suited for conservative investors who seek
increased dividend income through a growing portfolio of equity securi­
ties.
Equity-income funds have the following historical annualized returns
for the trailing three-, five-, ten-, and fifteen-year periods:


Mutual Funds

3-years
19.1

15

5-years
16.5

10-years
14.7

15-years
14.2

Multi-Asset Global Funds
Multi-asset global funds are total return funds that invest in varying com­
binations of equities—fixed-income and other asset classes. These funds
may invest a significant portion of assets in foreign securities.
The current portfolio for these funds is heavily weighted in foreign
government security bonds.
Multi-asset global funds have low standard deviation and beta scores
of 12 and 0.58 respectively. Since they are total return funds they seek to
find returns wherever available depending on the manager’s perception of
economic and market conditions. The category has the following histori­
cal annualized returns for the trailing three-, five-, ten-, and fifteen-years:
3-years
8.7

5-years
7.2

10-years
7.5

15-years
8.8

Eight-percent returns may not seem like much in today’s unusual
environment, but consider this; $100,000 invested today and earning 8
percent per year would grow to $466,000 in 20 years.

Specialized Companies
Funds of specialized companies seek capital appreciation by investing
primarily in stocks or companies within specific market sectors or indus­
tries. These funds are very targeted and can rise and fall with the business
cycle. For example, some funds specialized in equity securities issued by
health care companies such as drug manufacturers, hospitals, and
biotechnology firms. Other specialty funds invest in financial companies
such as banks, savings and loans, insurance, and brokerage firms.
Being concentrated, these funds can add quite a bit of zip to a welldiversified portfolio. However, they are not buy-and-hold funds. An
investor in specialty funds must have a clear strategy for buying and sell­
ing these potentially volatile issues.

Bond and Preferred Stock Companies
The last two classifications of mutual funds are the bond and preferred
stock companies. Funds in this group include:


16

Section I

1. Convertible Bonds
2. Corporate Bonds—High Quality
3. Corporate Bonds—High Yield
4. Government Bonds—Adjustable Rate Mortgage (ARM)
5. Government Bonds—Treasury

6. Multi-Sector Bonds
7. Municipal Bonds
8. Short Term World Income
9. World Bonds
Bonds are debt securities issued by corporations, governments, and
municipalities. All bonds have a maturity date—the date when the issuer
pays back the face value of the bond. There are often hundreds of differ­
ent securities in any given bond fund. Each one of these securities has a
maturity date; these maturity dates can range anywhere from a few days
to up to thirty years. “Weighted maturity” refers to the time left until the
average bond in the portfolio comes due or matures.
The standard deviation for bonds is less than 8 percent, or about half
the level of balanced mutual funds. This means the expected return for
any given month, quarter, or year will be more predictable than practical­
ly any other category of mutual funds.
Using a beta measurement for bonds is of little value, since beta
defines stock market risk and has nothing to do with interest rate or finan­
cial risk.

Convertible Bonds
Convertible bond funds are designed to offer some of the capital appreci­
ation potential of stock funds while also supplying some of die safety and
yield of bond funds, To do this they focus on convertible bonds and con­
vertible preferred stocks. Convertible bonds allow investors to convert
the bonds into shares of stock, usually at a preset price. These securities
thus act a bit like stocks and a bit like bonds.

Corporate Bonds— General
Corporate bond funds are designed to supply current income. They are
made up primarily of bonds issued by domestic corporations although

government securities often comprise a modest part of these funds. Most
portfolios consist exclusively U.S. issues.