Go Invest, Young Man (and Woman)

How do you invest when you don’t have much extra money?

You’re best off looking for one of three types of funds or some combination of them: those with low minimum initial investment requirements; so-called asset-allocation funds, which typically invest in a mix of domestic stocks, foreign stocks and bonds; and index funds, low-maintenance portfolios that try to mirror the market, not beat it.

Don’t know which of these to buy?

Don’t worry. That’s what we’re here for. We screened Morningstar Inc.'s universe of more than 9,000 funds to find you low-cost, high-performance portfolios in each of these categories.


Low-Minimum Funds

The minimum initial investment for the average mutual fund (at least those open to individual investors) is nearly $4,800, according to Morningstar.

For some of you, especially those fresh out of college, that’s a bit of a stretch. So to find good funds you can afford, we screened for stock portfolios with minimum initial investments about one-tenth as steep.

In the process, we discovered a couple of interesting things. For starters, the majority of solid low-minimum funds invest in U.S. equities, not foreign stocks. More important, many of the domestic equity funds that lure you in with low minimums turn around and whack you with high fees.


Of the 493 domestic equity funds that allow you to invest $500 or less, 415--or more than 84%--impose either a front- or back-end load (in some cases, both). Plus, these funds charge, on average, 23% more in fees than the typical mutual fund, according to Morningstar.

We took this into account when we screened for no-load funds that allow you to get in with $500 or less. We started by searching for solid performers. So we eliminated all funds that didn’t outperform at least 75% of their peers over the last one- and three-year periods.

From that list, we screened out all funds that didn’t have lower fees than the typical mutual fund’s 1.33%.

Two of the three funds that survived this screen--$5.9-billion Nicholas ([800] 227-5987) and its $1.1-billion small-cap cousin, Nicholas II ([800] 227-5987)--share manager David Nicholas. Both funds seek out “growth stocks at reasonable prices,” a popular approach among portfolio managers that helps them identify growing companies whose shares may be overlooked by investors.


The third fund that survived the screen, $626-million Excelsior Blended Equity ([800] 446-1012), is a unique large-cap fund. It invests using specific themes. For instance, it buys shares in companies benefiting from industrial restructuring, the communications boom and the aging of the population. With this approach, Excelsior has beaten 98% of its peers over the last 12 months.

Unfortunately, to locate additional low-minimum funds, we had to remove our requirement for a lower-than-average expense ratio. When we did that, three other quality funds showed up, led by $1.7-billion Idex Growth C ([888] 233-4339).

Despite its high 2.16% expense ratio, this large-cap growth fund, which doesn’t charge a front or back load, has delivered an astounding 42.41% over the last year and 29.2% over the last three, largely on the strength of its technology investments. So far this year, the fund has shown a breathtaking 43.79% gain.

Asset-Allocation Funds


Because asset-allocation funds are designed to satisfy all your needs through one portfolio--they diversify their holdings among U.S. stocks, foreign stocks and bonds--they tend to be safer than the typical U.S. stock fund--45% less risky, according to Morningstar’s three-year risk rating.

The trade-off? Since U.S. stocks have driven the recent bull market, asset-allocation funds haven’t delivered the total returns that domestic stock funds have recently. While the average U.S. stock fund is up 22.6% for the last 12 months, the average asset-allocation fund has advanced just 16.5% during that period. These funds tend to muffle gains in any one category.

With that understanding, we screened for only the best-performing asset-allocation funds, those that have beaten at least 90% of their peers over the last one and three years. We then screened out all load funds and funds with expense ratios greater than the typical mutual fund.

That brought us to five portfolios, including $5-billion Fidelity Asset Manager: Growth ([800] 544-8888).


Another solid fund that survived our screen was $150-million Value Line Asset Allocation ([800] 223-0818). The fund’s management team seeks out smaller and more growth-oriented stocks than the Fidelity team--and even higher-quality investment-grade bonds.

Index Funds

To find the best index fund for young investors, we did three things.

First, we screened for Standard & Poor’s 500 index funds--those that invest in blue-chip U.S. stocks--that beat at least 75% of their peers over the last one and three years. And since index funds are supposed to be low-fee vehicles, we threw out any fund that charged more than 0.5% in total expenses. (Obviously, we eliminated any fund with a load.)


Just because Morningstar calls something an index fund, that doesn’t mean the portfolio strictly adheres to indexing principles. When we eliminated those funds that are “index” in name only, we were left with three solid portfolios.

Leading the pack through the last three years--no surprise--is the standard-bearer Vanguard Index 500 ([800] 992-8845).

Since you may be interested in index funds that invest in slightly smaller stocks, which at times provide more growth than large companies, we also screened for non-S&P; 500 index funds with lower-than-average expenses and better-than-average performance over the last one and three years.

We came up with two: $263-million Dreyfus MidCap Index ([800] 373-9387), which mimics the S&P; 400 universe of medium-sized companies, and the $2.9-billion Vanguard Index Extended Market ([800] 992-8845) fund, which tracks the broader Wilshire 4,500 index that includes medium-sized and small companies that aren’t in the S&P; 500.


We also searched for an international index fund with a lower-than-average expense ratio and that managed to beat at least 75% of its peers over the last one and three years. We could only find one that also met our requirements for no loads and low minimums. It turned out to be another Vanguard fund--Vanguard International Equity Index European ([800] 992-8845), which mirrors the Morgan Stanley Capital International index of European stocks.


We know what you’re thinking. Isn’t there a single low-minimum index fund that suits all your asset-allocation needs? You know, a “three-fer”?

Well, we were thinking the exact same thing. Unfortunately, the best we could do was come up with funds that share two of these three attributes.


The best index fund we could find with low minimums: $3.7-billion Schwab 1,000 ([800] 435-4000), with a minimum initial investment of $1,000.

Among the asset-allocation funds we screened for, Value Line Asset Allocation was one of three that allowed you to invest just $1,000.

And the best index fund we could find that provides asset allocation: The $5-billion Vanguard Asset Allocation ([800] 992-8845) fund, whose stock portion tracks the S&P; 500 and whose bond portion adheres to the Lehman Bros. long-term U.S. Treasury bond index.



Fund Strategies considers tactics used to choose mutual funds. Times staff writer Paul J. Lim can be reached at


First Funds

If you’re fresh out of school or just getting started investing, your main options should be index and asset-allocation funds. The following no-load funds in those categories have outperformed a majority of their peers. If you have only $500 or so to invest, you also need funds with low minimums. The third group shows top-performing funds in that category.



Annualized Min. 800 or 1-year 3-year initial 888* return return invest. phone Index Funds Vanguard Intl. Equity Euro. 33.4% 26.2% $3,000 992-8845 Schwab 1,000 28.9 28.9 1,000 435-4000 Vanguard Index 500 28.9 30.1 3,000 992-8845 BT Invest. Equity 500 Index 28.7 29.9 2,500 730-1313 Dreyfus MidCap Index 23.8 22.7 2,500 373-9387 Vanguard Index Extend. Mkt 21.3 21.7 3,000 992-8845 Asset-Allocation Funds Eastcliff Total Return 34.6% 29.9% $1,000 595-5519 Value Line Asset Allocation 28.3 26.8 1,000 223-0818 Vanguard Asset Allocation 26.2 24.0 3,000 992-8845 Stagecoach LifePath 2040 A 24.2 24.7 1,000 222-8222 Fidelity Asset Mgr: Growth 23.1 21.1 2,500 544-8888 Low-Minimum Funds Idex Growth C 42.4% 29.2% $500 233-4339* Excelsior Blended Equity 34.8 26.3 500 446-1012 Muhlenkamp 31.9 31.4 200 860-3863 Aquinas Equity Growth 31.6 27.4 500 423-6369 Nicholas II 31.0 28.6 500 227-5987 Nicholas 30.9 30.3 500 227-5987 S&P; 500 29.1 30.2

Index Funds Vanguard Intl. Equity Euro. Schwab 1,000 Vanguard Index 500 BT Invest. Equity 500 Index Dreyfus MidCap Index Vanguard Index Extend. Mkt Asset-Allocation Funds Eastcliff Total Return Value Line Asset Allocation Vanguard Asset Allocation Stagecoach LifePath 2040 A Fidelity Asset Mgr: Growth Low-Minimum Funds Idex Growth C Excelsior Blended Equity Muhlenkamp Aquinas Equity Growth Nicholas II Nicholas S&P; 500



Source: Morningstar