Money 70: Funds for the long run

Investing is a marathon. Use our Money 70 funds to run a safe, steady race.
By Penelope Wang and Walter Updegrave

NEW YORK (Money Magazine) -- If ever there was a time when it paid to be diversified, it was last year. As the market got rocky amid an old-fashioned credit crunch, many blue chip U.S. stock funds took a beating.
Even some of the nation's best-known investors - like Bill Miller of Legg Mason Value and Bill Nygren of Oakmark Select - suffered losses due to troubles in the financial and housing sectors caused by the subprime mortgage mess.
But if you held your domestic stock funds within a well-diversified portfolio that included bonds and other types of equities, you didn't feel much pain. Indeed, if you invested in foreign equity funds in 2007, you probably earned double-digit gains, up for losses you suffered among your domestic funds.
The key is, you needed to be patient and balanced. A long-term view and a diversified asset mix - that's exactly what the Money 70, our list of recommended mutual and exchange-traded funds, is all about.
What we look for
When assessing funds, we don't focus on short-term performance swings, because history shows that funds that are hot in one period are often stone cold the next.
Nor do we try to spot the coming year's chart toppers, as other lists do.
In addition to being an exercise in futility, that's not the purpose of the Money 70.
What we're offering you is a menu of high-quality funds and ETFs that you can use as building blocks in constructing a prudent, well-balanced portfolio. We hope these funds will help you reach your long-term goals - which, by the way, don't include bragging rights around the watercooler.
In selecting the Money 70, we focus on criteria with lasting value. For example, we make sure that all of our funds charge fees lower than their category average. Why? Since fees reduce total returns, funds with low costs are likely to outperform those that levy steep expenses. This is such a simple concept it's amazing that high-fee funds can still exist.
We also look for funds with strong records for putting shareholders first, as measured by Morningstar's stewardship grades. These ratings evaluate such factors as a fund group's corporate culture, regulatory history and board independence. The way we figure it, while you can't control how good your returns will be, you can at least stick with stock pickers who've been good to their investors.
On top of that, we look for funds with a consistent strategy and experienced managers.
Of course, we also consider performance - but over the long term. We prefer funds with better-than-average returns over five years, although we make some exceptions, as we'll explain.
These standards don't always prevent our funds from stumbling. Over the long run, however, the majority of the Money 70 funds have performed admirably. Even in last year's difficult market, 57% of the actively managed funds on our roster delivered returns that rank in the top half of their category; and over the past five years, 73% outperformed their category average.
There's one more thing: The Money 70 is designed to help you construct all aspects of your portfolio. For your core holdings, you might consider one of the 25 index funds or ETFs on our list. If you're willing to take a few more chances, check out the 43 actively managed stock funds we like. And if you simply don't want the hassle of building your own portfolio, you can choose either of two sets of target-date portfolios, which give you a preset mix of funds that automatically becomes more conservative as you near retirement.
This year's changes
Though we believe in buy-and-hold investing, we did make a few alterations to our list.
Actively managed funds: We removed Fidelity Dividend Growth and Madison Mosaic Investors. Neither kept pace with other large-cap funds in their category (they ranked in the bottom 10% of their peer group over the past five years).
But it's not about raw performance. If a fund lags its category for a long enough time, you have to question whether it's fulfilling its role in your portfolio.
If you own these funds in your 401(k) or IRA, where selling won't trigger an immediate tax bill, we recommend you shift into a better choice: FMI Large Cap. This low-cost fund also invests in blue-chip stocks. The managers' risk-averse approach kept the fund out of troubled financial stocks recently, which helped it rank in the top 24% of its peers over the past three years.
More important, FMI's consistent investing style makes it a better portfolio building block over time. A few other funds on our list have also lagged their peers.
Among them: American Funds American Mutual, Matrix Advisors Value, Jensen, FAM Value and FPA Perennial. These funds have something in common: They take a lower-risk approach than others in their categories. This means they might lag during stretches when the market is soaring - like the five-year-old bull market.
But they hold up well in downturns. So their five-year results, which don't reflect the 2000-02 bear market, may understate their long-term potential. Especially in light of today's shaky economy, these funds still make sound choices. Taking a low-risk approach was not what held back Weitz Hickory and Muhlenkamp, two other laggards on our list. These go-anywhere funds were torpedoed by big stakes in subprime lender Countrywide and other financial and real-estate- related stocks.
But Wally Weitz and Ron Muhlenkamp are contrarians with a tradition of wild performance swings - their chart-topping years are followed by periods in the cellar and vice versa. Their 10-year returns are still strong. It's worth hanging on to these multicap funds since history suggests they'll soar again.
Meanwhile, we are adding Third Avenue International Value to the roster. Run by Amit Wadhwaney, the fund focuses on overlooked small and midsize foreign stocks, an often forgotten category, but one that provides needed diversification and that hasn't been represented before on the Money 70. To keep its assets at a manageable level, the fund had been closed to new investors for years, which is a strong sign of stewardship.
But it reopened recently when Wadhwaney began spotting more opportunities in the wake of the upheavals in the global financial markets. Because the fund looks for small, undervalued shares in overseas markets, it probably doesn't invest in stocks your other foreign funds do. For all these reasons, we think International Value, a low-cost fund run by a respected fund family, is a solid new addition to the list.
Index funds and ETFs: While it's hard to tell which actively managed funds will outperform in any given category, that's not the case with index funds. Since these portfolios just mimic a market index, it's simply a matter of arithmetic that the lowest- cost funds are likely to beat out more expensive peers that track the same benchmarks.
With this in mind, we revisited all of our index funds and ETFs. We noticed that Vanguard recently introduced ETF versions of Vanguard Short-Term Bond and Vanguard Total Bond Market, which are both on the Money 70 index fund roster. With fees of only 0.11%, Vanguard's ETFs are cheaper than two similar ETFs on our list: iShares 1-3 Year Treasury (0.15%) and iShares Lehman Aggregate Bond (0.20%).
Moreover, Vanguard Short- Term Bond ETF offers a broader range of fixed-income issues than iShares 1-3 Year Treasury.
So we are replacing the iShares ETFs with their Vanguard counterparts. Vanguard also launched an ETF that tracks the Morgan Stanley Capital International EAFE index, a benchmark for developed stock markets in Europe, Asia and Australia.
Vanguard Europe Pacific sports a 0.15% expense ratio, which is significantly lower than the 0.34% fee for iShares MSCI EAFE, so we are swapping these ETFs as well.
We are also adding the Vanguard FTSE All- World ex-U.S. This new ETF tracks both developed and emerging markets, including Canada, which enables investors to buy the whole world outside the U.S. with a single ETF. Finally, we are dropping iPath Dow Jones-AIG Commodity Index.
This is actually not a fund but an exchange-traded note, or ETN - a structure designed to minimize taxes. ETNs recently came under the scrutiny of the IRS, which might disallow their favorable tax treatment. If that happens, it could be trouble for investors in taxable accounts.
For an alternative in the Money 70, try T. Rowe Price New Era, a mutual fund that buys mainly natural-resources stocks, or iShares S&P GSSI Natural Resources Index, an ETF that owns energy and commodity shares. Whether you opt for ETFs, index funds or actively managed portfolios, you can be assured of some important advantages with the Money 70.
You will pay reasonable fees, and the fund managers are unlikely to betray your trust and will stay consistent in their strategies. In an uncertain world, those advantages will give your portfolio a big head start toward your long-term investing goals.

China may block $2B Citi deal - report

Chinese government may halt China bank's investment in Citigroup, according to The Wall Street Journal.

HONG KONG (AP) -- Opposition from the Chinese government may stop Citigroup Inc.'s plan to raise capital by selling a stake worth $2 billion to a Chinese bank, The Wall Street Journal reported on its Web site Monday.
Cash-strapped Citigroup (C, Fortune 500), hurt by the mortgage crisis that boiled up last year, has been seeking foreign investors, including China Development Bank, to boost its balance sheet in the face of mounting write-offs.
The Journal reported that opposition from the Chinese government seems to have surfaced over the weekend, citing an unnamed person familiar with the situation. It is not clear whether the deal has been abandoned, the newspaper said.
Yang Hua, director of China Development Bank's news department, said she was not aware of any plans for China Development Bank to invest in Citigroup or any government opposition to such investment, according to the paper.
Foreign investors ride in to rescue Citi
A telephone call by The Associated Press to the bank rang unanswered after business hours, and in New York, Citigroup spokeswoman Shannon Bell declined to comment.
The U.S. financial group is hoping to announce a capital injection from investors when it releases its fourth-quarter earnings Tuesday, the Journal said.
The cash-strapped Citigroup has already gotten $7.5 billion from the Abu Dhabi Investment Authority. On Nov. 26, the ADIA bought a 4.9 percent stake in Citi, becoming its largest shareholder.
The possible failure of the plans of China Development Bank to invest in Citigroup comes after a series of Chinese institutions have put money into struggling Wall Street firms. Most recently, China Investment Corp., the country's sovereign wealth fund, agreed to invest $5 billion in Morgan Stanley.
China Development Bank, which was established in 1994 and is now preparing to become a commercial lender, got a $20 billion injection Dec. 31 from China Investment Corp.

Money 70: The best mutual funds you can buy

Money Magazine's list of recommended funds is not about aiming for the highest short-term returns. Our lineup is designed to let you build a well-balanced portfolio that will help you reach your most important financial goals, like putting your kids through college, starting a business or achieving a comfortable retirement.

We focus on criteria that have real predictive value: low expenses, a strong record for putting share-holder interests first, a consistent investment strategy and experienced managers.

A fund that meets our standards typically ends up delivering above-average returns - over the past five years, 73 percent of the actively managed funds on our roster outperformed their category average. Even in 2007's difficult market, 57 percent delivered returns that rank in the top half of their category.

The Money 70 is designed to help you construct all aspects of your portfolio. It includes a range of actively managed stock and bond funds, as well as low-cost index and exchange-traded funds. Or you can put your investments on cruise control with one of our target-date retirement portfolios, which give you a preset mix of funds that automatically becomes more conservative as you near retirement.

GM in talks over more buyouts

Automaker says it's close to reaching an agreement with the United Auto Workers union on another round of buyout offers.

DETROIT (AP) -- General Motors Corp. is close to an agreement with the United Auto Workers on another round of buyout and early retirement offers to cut the number of workers in jobs banks and clear openings for workers hired at lower-tier wages, a top company official said Sunday.
Troy Clarke, GM's North American president, told reporters at the North American International Auto Show that an announcement could come within a week.
"We are negotiating in some cases plant-by-plant, but certainly group-by-group or issue-by-issue, how to roll out a special attrition program," Clark said. "We think that we'll have that done very soon."
Clarke said he couldn't reveal specifics of the plan because negotiations continue.
The company already has announced plans to offer buyouts and early retirement packages to 5,200 UAW hourly workers at service and parts and operations facilities across the country.
The offers also will be available to hourly employees at GM's Pittsburgh metal stamping plant and Massena, N.Y., casting plant, and to all hourly employees currently assigned to jobs banks in Oklahoma City, Linden, N.J., and Rancho Cucamonga, Calif. In jobs banks, workers get most of their pay even though they have been laid off.
Once they get through the jobs bank employees, buyouts will be offered in locations where GM (GM, Fortune 500) wants to pay the lower-tier wages.
GM wants up to 16,000 hourly UAW workers to leave the company. Many would be replaced by workers at the lower-tier wage scale approved under a landmark four-year contract reached with the union last year.
Such new hires would be mainly in non-manufacturing jobs and would receive reduced health care and pension benefits.
GM also anticipates replacing many higher-paid workers with entry-level employees who will make less.
Current UAW employees earn about $28 an hour, while entry-level wages begin at about $14-$15 an hour.
Chairman and Chief Executive Rick Wagoner said the company probably won't see much savings from the lower-tier wages in 2008 but would begin to realize them in 2009.
"I would be surprised as we head out of this year if there's a significant economic impact in second-tier, but we could see numbers that move into the thousands rather than hundreds as the year goes on or approaches the end of it anyway," he said.
More than 34,000 GM workers left in 2006 by way of retirement or buyouts.
If the economy worsens this year and GM has to further cut production to handle lower demand, Clarke said it currently is not looking at closing any factories.
"When we talk about adjusting our capacity, we're not talking about shutting down plants," he said. "We're talking about (assembly) line rate changes, I think. We're talking about down weeks. At least that's what our thought is today. We'll have to see how it goes."
He also said he's optimistic about an industry rebound in the second half of 2008.
December U.S. sales excluding those to fleets jumped to an annual rate of 13.7 million, one of the best retail sales rates of the year, and the nation should be through most of its adjustable-rate mortgage increases during the first half of the year, Clarke said.
"We get through that factor and this kind of general malaise, we think that the market has an opportunity to strengthen," he said. "We're optimistic that the market does have some resiliency. There does appear to be some pent-up demand."

Detroit's bumpy road to better times

U.S. automakers struggle with weak sales, ongoing losses as Detroit auto show kicks off, but lower labor costs, overseas growth could help in future.

DETROIT (CNNMoney.com) -- The Detroit News welcomed Detroit auto show attendees to town over the weekend with the headline "Carmakers try to overcome gloom."
Oil at $100. The worst sales since 1998. Billions in continuing losses. New fuel economy regulations on the horizon.
There's plenty weighing on the industry, especially the U.S. automakers, as they gather for what is officially called the North American International Auto Show. Forecasts are that U.S. sales are going to be down again this year from last year's weak level, as both high gas prices and a weak housing market weigh on car buyers.
But while there's plenty of trouble facing the industry, there are also signs of hope for U.S. automakers, in the form of new labor deals, new management and new opportunities overseas.
"As bad as it is, it could be worse," said Tom Libby, senior director of industry analysis for J.D. Power and Associates. "If you think about it, all three have taken big steps. None of them will have the strength they used to have in the near term. But they have some good new product in the pipeline and the drop in costs is going quicker than they anticipated."
Still, Libby and other experts agree it's going to be another tough year ahead for the industry in general but for the Detroit based automakers, in particular, as Ford Motor (F, Fortune 500), General Motors (GM, Fortune 500) and Chrysler LLC try to stem ongoing losses from their auto operations.

Stocks set for slight gains

Futures narrowly higher as investors mull when Fed will cut rates; bank earnings loom.

NEW YORK (CNNMoney.com) -- U.S. stocks futures gained early Monday, lifted by hopes that the Federal Reserve would step in with an emergency rate cut, although looming bank earnings remained a worry.
At 4:53 a.m. ET, S&P 500 and Nasdaq futures were narrowly higher, hinting at a flat to slightly positive start for Wall Street.
Stocks tanked last week on increasing concerns about the economy, but the darkening outlook has also raised hopes that the Fed would slash rates before its next meeting.
A report in the Wall Street Journal said the Fed is unlikely to cut rates before its next meeting on Jan. 29-30 because Fed Chairman Ben Bernanke has already "recalibrated market expectations." But that could change if the outlook dramatically worsens, the report added.
Investors have been haunted by recession worries recently, and earnings results due this week from a number of big banks could spark more fears. Embattled banks Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are both expected to take giant writedowns when they post their results.
In global trade, Asian markets tumbled. Japanese markets were closed for a holiday. European stocks edged higher in morning trading.

America's fastest-growing small public companies

PrimeEnergy
Rank: 24 (Previous rank: 11)Get quote: PNRG Industry: Energy CEO: Charles E. Drimal Jr., CEOHeadquarters: Stamford, CTEmployees: 206 (as of March 25, 2006)
Analysis:PrimeEnergy is an oil and gas exploration and development company with properties in six states and the Gulf of Mexico. Its subsidiaries service oil and gas wells and manage oil and gas limited partnerships.

Sun Hydraulics
Rank: 25 (Previous rank: 14)Get quote: SNHY Industry: Manufacturing/Industrial CEO: Allen J. Carlson, CEO & PresidentHeadquarters: Sarasota, FLEmployees: 663
Analysis:Sun Hydraulics designs and makes screw-in hydraulic cartridge valves and manifolds that control force, speed and motion in mobile and industrial machinery. Sun, which operates in the U.S. and five other countries, has generated a profit every year since 1972.


Parallel Petroleum
Rank: 26 (Previous rank: 27)Get quote: PLLL Industry: Energy CEO: Larry C. Oldham, President & CEOHeadquarters: Midland, TXEmployees: 41
Analysis:Parallel Petroleum drills through rock for natural gas horizontally, releasing the gas more efficiently from locations in Texas and New Mexico. Acquisitions and development of properties during the past five years helped increase PLLL's proved reserves over 52% last year.


U.S. Lime & Minerals
Rank: 27 (Previous rank: 20)Get quote: USLM Industry: Manufacturing/Industrial CEO: Timothy W. Byrne, President & CEOHeadquarters: Dallas, TXEmployees: 317
Analysis:USLM manufactures lime and limestone products used for highway construction, parking lots, steel manufacturing and water purification. The company sold its products to 900 customers across 14 states last year.


Edge Petroleum
Rank: 28 (Previous rank: 4)Get quote: EPEX Industry: Energy CEO: John W. Elias, Chairman, President & CEOHeadquarters: Houston, TXEmployees: 75
Analysis:Founded in 1983, Edge is a crude oil and natural gas exploration, development, and production company. Last year its proven reserves decreased slightly from 2005, but Edge still drilled 52 wells with an 83% success rate. About 75% of its daily production is natural gas.


Ansoft
Rank: 29 (Previous rank: N/A)Get quote: ANST Industry: Tech CEO: Nicholas Csendes, President & CEOHeadquarters: Pittsburgh, PAEmployees: 305
Analysis:Ansoft's software simulates the design and performance of circuitry and electromagnetic fields inside high-speed computers and wireless communication devices, so engineers no longer need to build prototypes. A demand for faster integrated circuits within wireless devices is driving sales.

Cybex International
Rank: 30 (Previous rank: N/A)Get quote: CYBI Industry: Consumer CEO: John Aglialoro, Chairman & CEOHeadquarters: Medway, MAEmployees: 547 (3/30/2007)
Analysis:Cybex is a household name among fitness enthusiasts, who build strength and endurance on the company's machines, both at home and in the gym. Its products include treadmills, cross trainers and weight equipment. Last year Cybex broke ground on a new office and manufacturing facility on 36 acres in Minnesota.