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Fundamental Funds

Bond and value funds were the unloved stepchildren of the 1990s bubble. Not surprisingly, the two styles are popular again.

During the height of the 1990s bull market, some reps gave up trying to interest their clients in bonds. As tens of billions of dollars flowed into technology and growth funds, many bond portfolios suffered net withdrawals.

But guess what? After posting strong returns in 2001, bond funds are all the rage. During the past year, the top-selling fund was a bond specialist, PIMCO Total Return (see article on page 61). And bond funds weren't the only beneficiaries of the treacherous market shifts. According to Financial Research Corp., the list of the 20 top-selling funds includes value and balanced funds, categories that had been ignored because their returns were lousy.

Net sales have little predictive value in picking a fund that will outperform its benchmark in the near future, according to a recent FRC study. Therefore, contrarians may argue that now is the time to grab growth stocks, and maybe even a technology holding or two.

Mixing it Up

However, most investors are not willing to go against the crowd. Fund companies report that money is still flowing into bond and value funds. “People tend to buy the funds that have the best trailing returns,” says Jim Stueve, director of retail sales for AIM Funds. “We always try to tell clients about building diversified portfolios, but this year the best sellers are value funds again.” AIM Basic Value fund, along with MFS Value, were among the favorites after posting index-beating returns. Both are normally known for their growth choices.

Among the biggest winners were balanced funds, with a mix of stocks and bonds. Because the funds can shift their asset allocations, many advisors consider them ungainly contraptions that don't fit easily into a client's customized portfolio.

Awkward or not, many balanced funds posted positive returns last year, and that was enough to attract investors. The top seller in the group was American Funds Balanced, which has long been noted for its low-risk strategy. “Advisors feel a tremendous amount of loyalty to American because they know its funds won't blow up,” says Whitney Dow, an analyst at FRC.

Holding investment-grade bonds and blue chip stocks, American Balanced has returned 11.3 percent annually over five years, outpacing the S&P 500 by 3 percentage points.

Credit for the record goes to a team of managers that aims to avoid hot shares and increase the allocation to bonds when stocks seem expensive. That approach helped the fund avoid overpriced technology stocks and stay in the black during last year's downturn.

Also popular was Oppenheimer Quest Balanced Value, which beat the S&P 500 by 5 percentage points over five years. Portfolio manager Colin Glinsman, who took over the fund in 1992, has never recorded a losing year. Glinsman keeps about 40 percent of assets in fixed income and holds the rest in a concentrated portfolio that includes 35 or so stocks.

Bond, Balanced and Value Funds Dominate Top 20 List
Complex Name Portfolio Name Net Flows* through 1/02 (in billions) 1-Year Return** through 2/28
1. PIMCO Funds PIMCO TotRtn $9.03 9.22%
2. American Funds Grth Fnd Amer 7.32 -11.47
3. Vanguard Group Vngrd TotBndIdx 5.18 7.23
4. Vanguard Group Vngrd GNMA 4.27 8.02
5. Fidelity Distributors Fdlty Lo Price 4.11 20.75
6. American Funds Amer Balanced 3.99 6.15
7. Fidelity Distributors Fdlty DivGrth 3.97 -2.72
8. Vanguard Group Vngrd TotStkIdx 3.46 -8.43
9. AIM Distributors AIM Basic Val 3.43 -4.08
10. Dodge & Cox DdgeCox Stck 3.42 7.51
11. Alliance Fund Distributors Allnc Gr & Inc 3.39 -8.06
12. Van Kampen Funds VnKmpn Comstk 2.95 -3.37
13. American Funds Invst Co Amer 2.95 -3.66
14. Vanguard Group Vngrd 500 Index 2.93 -9.65
15. OppenheimerFunds OpphmrQst BalVl 2.91 -7.21
16. American Funds Wash Mutl Invs 2.65 0.66
17. Davis Selected Advisers Davis NY Vnture 2.25 -10.46
18. PIMCO Funds PIMCO RealRtn 2.20 5.84
19. Smith Barney Asset Management SB Agg Grth 2.19 -13.16
20. MFS Investment Management MFS Value 2.14 -2.97
*Source: Financial Research Corp.
**Source: Morningstar

He isn't shy about focusing on a few industries. In 1999, the fund had a big position in technology that he cut back in time to avoid much of the downturn. “Investors who have been burned look at this fund as a way to participate in the markets without taking all the risk of equities,” says Mark Burns, an Oppenheimer marketing manager.

In a year when investors craved bonds, it should be no surprise that PIMCO Total Return ranked at the top of the sales list. Portfolio manager Bill Gross has long reigned as the best-known bond fund manager. While Gross keeps most of his assets in standard investment-grade fare, he gains an edge by emphasizing certain sectors and placing well-timed bets on moves in interest rates.

Figuring that rates would fall last year, he lengthened the duration of his portfolio, enabling the fund to once again race past most competitors. “It's usually hard for a bond fund to stand out, but Gross makes a great sales story for brokers to bring to their clients,” says Dow.

The other PIMCO fund on the list is a newcomer to the top-selling ranks. Focusing on securities that serve as a hedge against inflation, PIMCO Real Return was a small portfolio until 2000 when it returned 13 percent, an eye-popping result for a low-risk bond fund. The steady flow of cash into the fund turned into a flood last year when portfolio manager John Brynjolfsson again beat most competitors.

The returns got a boost as worried investors raced to high-grade bonds of all kinds, including Treasury inflation-protection securities, which are PIMCO Real Return's main holding. Stephen Maginn, PIMCO's executive vice president, says most of the sales are coming from institutions and advisors serving high-net-worth clients. Although inflation remains low, these customers recognize that it pays to put a small portion of assets into a vehicle that will provide diversification when prices rise.

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