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THE ANSWER DESK . . . ARCHIVES

Volume 70: To submit a question to MFI's panel of experts, please write to us.

This week's panel:

Frank Armstrong Frank Armstrong is author of Investment Strategies for the 21st Century, published here, and president of Managed Account Services, Inc., a fee-only advisor specializing in global asset allocation strategies utilizing no-load mutual funds. Frank is a Certified Financial Planner (CFP) with 24 years' experience helping investors build wealth. The firm, an SEC Registered Investment Advisor currently manages in excess of $60 million for over 140 clients worldwide. Visit Frank's Managed Account Services, Inc. for more information about the Alternative to Business as Usual on Wall Street or call 1-800-508-8500.

Richard Chiozzi Richard E. Chiozzi is a founding principal of Successful Financial Solutions, Inc., a fee-only financial planning and registered advisory investment firm based in suburban Chicago. Richard is a Certified Financial Planner (CFP), and a Registered Securities Principal. He has been in the financial service industry since 1981 and has lectured at NAPFA and ICFP national and regional conferences. Richard is a frequent author on financial planning issues in leading financial publications and also hosts a one-on-one cable television talk show in suburban Chicago. Richard can be reached at his website or call (800) 417-1141.

Questions and Responses

• Where can one invest if she wants to focus on a single company?
• Is my broker's suggestion for a loaded fund a reasonable bet?
• How should a mutual fund investor prepare for the Y2K problem?
• Have we been treated fairly by our front-end loaded fund?

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Where can one invest if she wants to focus on a single company?

from James

Q: My mom has sent me on a quest to find a mutual fund that is heavily invested in DELL, do you know of any, or where I might be able to contact someone who would know?

A: (Richard) Funds generally report their holdings twice a year to rating and reporting services such as Morningstar. By the time this information is published, however, the entire position may have changed and the fund you thought had a large concentration of Dell may have liquidated its entire position. People who invest in mutual funds usually do so to diversify. If you believe you already have a diversified portfolio and you like Dell, buy some Dell.

Is my broker's suggestion for a loaded fund a reasonable bet?

from David

Q: I want to invest some money, about $5000, into a new mutual fund. I cashed out of one that was not rated to be too safe in down markets. My broker suggested MFS Capital Opportunities Fund, which from my research looks like a reasonable bet. However, I don't know if it is better to wait until later in the spring, jump in now, or dollar cost average over the next 12 months. I am worried about the fees getting in which may take a bigger bite if I invest in 4 chunks rather than in one. Also, should I take the A or the B option? What do you think of this fund. It seems to be more value oriented and therefore safer in a down market.

A: (Richard)  We prefer no-load funds that put 100% of your money to work up-front and permit you to sell without incurring a back-end load. MFS Capital Opportunities has a good track record and is available in A or B shares, which is the method used to calculate the load. With A shares you pay the load at time of purchase. B shares charge you a fee if you sell before you’ve held the fund for 6 years. This fund has above average expenses including a 12-b(1) charge each year (sales fee paid to broker or brokerage firm). You may want to consider purchasing a no-load fund, such as the Vanguard 500 Index, which is also a large cap blend that has outperformed MFS Capital Opportunities over the long term while maintaining very similar risk characteristics.

How should a mutual fund investor prepare for the Y2K problem?

from Len

Q: If a mutual fund investor is unsure of the extent of the y2k problem, should he be changing the asset allocation of his investments. In other words,  should he sell equity funds by mid-1999 and get into some other type of mutual fund?  If so what strategy do you recommend?

A: (Frank) Y2K is a big problem, but not the end of the world as we know it.

The problem has several dimensions for investors. First, what is the economic impact or cost? Next, will markets be able to trade? Finally, what will be the impact on market prices, and how long will it take to sort itself out?

No one can tell you whether Y2K will be a disaster or a dud.

Most economists believe that

1. A one time event has little impact on markets.

2. The problem is so well known that it has already been fully discounted by the market.

Having said all that, I think there will be an increasing hype as New Year approaches. So, it would be difficult to predict whether investors will get more irrational than they sometimes appear to be. If I had to guess, when we look back on this, investor sentiment will have been far more important than actual events. And, it's the hardest to figure out. In other words, how big an investment risk we have will depend on how crazy all the other players get.

Playing a market timing game against millions of other investors ranging from fully informed to totally nuts will take more skill than I believe I can muster. Anyone that tries to play that game will have to guess right as to both the exit and reentry dates. In my humble opinion there are big risks if you are wrong on the timing. Suppose nothing much happens while you are out, and the market goes up? On the other hand, for a buy and holder like myself, there may be a few gyrations, but I think by March 1st it will all be back to normal and largely forgotten.

I am fully aware that I don't have an answer to give you. But, I don't think anyone else does either. The whole problem makes me wish I had a better crystal ball.

Have we been treated fairly by our front-end loaded fund?

from Carol

Q: We have a front-end loaded mutual fund which we got into when we were less savvy financially. It ties us up for 15 years, ending in 2002. For the past 5 years, we have been very unhappy with this fund's performance. It is Fidelity Destiny II and is pushed by a company that caters to military officers, senior NCOs and civilians. Since last year was a terrible year for this fund, we were extremely dismayed when they paid their dividend in December 1998. Reason? On the day they paid their dividend, they lowered their stock price by $2 a share. Sure they paid a dividend, but we incurred an actual, very large loss due to this practice. Two months later, the fund has barely recovered to its pre-dividend share price. Is this a legitimate practice and, if not, what can we do about it?

A: (Frank) I personally believe that the "contract" plans are a gross abuse, and anyone selling them should be afraid to step on a military base. A 50% load the first year is unconscionable, and the continuing load runs about 5%, depending on the amount of your monthly deposit.

The performance of the funds themselves has been wonderful, the manager and the fund are very highly rated. Last year the fund had a total return of 25.63% which isn't too shabby, so perhaps you made your investments during one of the more volatile periods. The ten year compound rate of return is over 20%, which impresses me! However, if it doesn't meet your needs, you always have options.

I question the value of the advice that you received relative to the cost that you are paying. So, you might want to at least direct future contributions to a no-load fund. There are plenty of great no-load funds that will accept small monthly contributions via payroll deduction. As an example, USAA has a long history of service to the Armed Forces. You could open an account with $100, and make monthly deposits as low as $50. Their number is (800) 531-8343. Another great outfit to check out is TIAA-CREF.

If you stop your contributions to your present fund, you will not lose anything, but you will be charged a $12 contact fee each year that will be deducted from your dividends. You can, if you wish, sell them all at net asset value and transfer them to another (no-load) fund.

The end of year dividend is a required accounting for the fund's net capital gains, interest, and dividends. The NAV of the fund is reduced by the amount of the dividend, and the holder is awarded shares exactly equal to the dividends. The real impact of all this is that you get to pay your share of the fund's taxable events. Discounting the tax question (which I think is very important) you are not either better or worse off as a result of the dividend. Your fund does have high turnover, and so it will generate a taxable gain during most years, even if they have losses during that particular year.

Hope that helps, and thanks for serving in the Armed Forces. We all owe you.

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