No Smoking, Please
Q Because of the downsizing of my department, I will be rolling over my 401(k) plan. Do you know of any good, low-cost balanced fund that does not have any tobacco stock in its portfolio? I have been looking at the Vanguard Wellesley Income Fund. What do you think of this fund?
--C.W., Springfield, Ill.
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A It’s difficult to find major funds that don’t own Philip Morris or one of the other tobacco companies. About the only way to be sure you avoid tobacco stocks is to concentrate on the Social Responsibility funds, funds managed with social as well as investment objectives. There are 48 of those, of which 10 have above-average four-star ratings from Morningstar.
Of those 10, the top performer in the last three years was Domini Social Equity, at 25.01%, compounded annually. This performance put it in the top 15% of all funds in its group (growth and income). This is a no-load fund with a relatively low annual expense ratio of 0.98% and a minimum initial investment of $1,000. You can get more information by calling (800) 762-6814. The fund is also available through major fund networks such as Charles Schwab, Fidelity and Jack White.
Vanguard Wellesley Income is a four-star fund that concentrates on large-cap value stocks. It has no load, a very low expense ratio, and a performance that tends to be in the middle of the pack. Recently, its 30-day yield was 5.9%, largely because common stocks account for only 37% of the portfolio. You can get more information by calling Vanguard at (800) 662-7447.
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Q I am 37, married and have four children under age 4. I am the owner of a medium-sized commercial real estate service company. Since 1993, my personal income has averaged about $200,000 a year and should be the same for 1997. I have $148,000 in financial assets and $75,000 equity in a $275,000 house. I also have $75,000 cash in my company account after taxes.
My broker at Rauscher Pierce placed the money I have in mutual funds, about $72,000, in several American Funds Group funds--New Perspective, Small Cap and Fundamental Investors--at a 4.5% fee.
What is your opinion of these funds? I will soon receive $40,000 and wonder about no-load funds or further investment through my broker.
-- R.A., Austin, Texas
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A If you feel comfortable with your broker, keep on. I write a lot about no-load funds and people who have been ill-served by commissioned products from advisors, but there is nothing inherently wrong with commission-based sales if you get a good advisor who keeps the same phone number and leads you to a good product.
That’s what you’ve got. Fundamental and New Perspective are four- and five-star funds, respectively, and regularly perform in the top 25% of funds or higher. Small Cap World, so far, is a middling-performance fund, but its performance may be more a product of its investment in small companies than in any deficiencies of management judgment.
You can probably make more money running your business than you can saving money on commissions.
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Q My wife and I are 75 and 73 years of age and feel that our investments are spread out too much. Our retirement income must come from Social Security and our savings of approximately $555,000. Our home is paid for and valued at about $125,000. Our savings are invested as follows:
* 23% in growth and income stocks with an average yield of 3%.
* 10% in utility-type stocks with average yield of 7%.
* 10% in mutual funds (AARP GNMA) with a yield of 5%.
* 21% in bonds and government securities that yield about 7%.
* 26% in CDs with an average yield of about 6.5%.
* 5% in Series E bonds that will mature in 1998; yields average about 6%.
* 4% in cash for emergency funds (money market), 3% yield.
We need to average about 7.5% to avoid dipping into our savings. Our plans are to use the Series E bonds for travel and vacations when they mature next year. My thinking is to place the growth and income stocks into a high-income bond fund. What is your opinion of this?
--L.R., San Antonio
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A Your focus on current income yield could lead you to some problems. The current fixed-income market is very tight and very optimistic. Basically, investors are ignoring differences in risk and quality. As a result, the yield spread between Treasuries and junk bonds is low. Junk bonds would probably suffer in a recession even if interest rates on Treasuries fell because the “risk premium” between the two would grow.
It is possible , for instance, that yields on Treasury obligations would fall by 1%, but yields on junk bonds of the same maturity could climb by 1% or 2%. Treasury bonds would rise in value; junk bonds would fall.
The change you propose would also put you in the position of having a portfolio that was 100% fixed-income, even if it came from quite a few fixed-income sources.
What to do instead?
Stay where you are. Keep your growth and income stocks, but work on making your other holdings more income-efficient. This means moving your emergency cash to a money market mutual fund instead of a bank money market account, reinvesting your E bonds when they mature in 1998 in Treasury obligations, repositioning your CDs when they mature into Treasury obligations and doing the same with your AARP GNMA shares. You’ll do better as a straight Treasury investor. To augment income from the 75% in fixed income, you might consider committing 10% to a junk bond fund. But no more.
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Scott Burns writes for the Dallas Morning News. He can be reached at scott@scottburns.com, or at his Web site at https://www.scottburns.com
