Pain Was Spread Unevenly Among Popular 401(k) Funds

If you haven’t received your quarterly 401(k) plan statement yet, you will. Soon.

And you probably won’t like what you see.

For the first time, possibly since you began investing in your company-sponsored retirement plan, you’ll notice that most of your stock funds have lost money--both over the last three months and on a year-to-date basis.

And those nice, fat 20%-plus annual return figures many of you have grown accustomed to over longer periods have most likely disappeared.

What should you do?

To help you decide--and to gauge how well your 401(k) funds are doing relative to their peers--we’ve prepared a snapshot of how some of the most popular 401(k) funds offered by Southern California employers have done recently:

Large Growth

Vanguard U.S. Growth

3rd Qtr: -9.4%

Comments: This $11-billion fund held up better during the third quarter than the average large-cap growth fund, which fell 11.2%.

Unlike most growth funds, which seek out the fastest-growing companies in various sectors, Vanguard U.S. Growth will invest in companies growing 13% to 15%--modest by the standards of most growth funds--provided they have strong balance sheets.

Co-managers David Fowler and Parker Hall believe these companies will do a better job meeting earnings expectations than the highfliers. And during the recent market slide, companies able to meet earnings expectations held up far better than those that couldn’t.

Year-to-date, U.S. Growth is up 12.2%. Over the last three years, it’s delivered annualized returns of 23.9%. It’s a keeper.

Fidelity Growth Company

3rd Qtr: -8.3%

Comments: There’s good news and bad news when it comes to this $8.7-billion fund.

During the quarter, Fidelity Growth Company held up significantly better than its peers. In fact, the fund fell about 26% less than the typical large-cap growth fund.

To some degree, that’s because the fund hasn’t invested as heavily as its peers in financial stocks, which have been battered over the last three months on fears of a pending global financial crisis.

Longer-term, the picture’s a bit murky. Year-to-date, Growth Company is up only 5%. And over the last three years, the fund has returned just 13.6% a year, at a time when the market drove up the prices of many large-cap growth stocks. Morningstar analyst Russel Kinnel wrote in a recent report that manager Steve Wymer had a tendency to hold on to losing stock picks too long. Despite its short-term performance, you may want to see if your company offers a better large-cap growth fund in its 401(k) plan.

Large Value

Fidelity Equity-Income

3rd Qtr: -12.9%

Comments: If you’re looking for the average large-cap value fund, you’ve found it.

During the third quarter, this $20-billion fund fell just slightly more than the average large-cap value fund. Year-to-date, Equity-Income is down exactly the same amount as its peers. And over the last three years, it’s generated annual returns of 17.3%, once again just slightly more than its peers.

Is this a bad thing? Not really.

Equity-Income follows a sound philosophy of investing. It tends to buy large blue-chip U.S. stocks, leaders in their respective industries, with above-average dividend yields. Dividend income protects a fund’s returns when the market is flat or losing ground and boosts returns when the market is soaring.

Neuberger & Berman Guardian

3rd Qtr: -26.2%

Comments: This $2.1-billion large-cap value fund has seriously disappointed of late. Over the last three months, this fund has lost more than twice as much as its peers.

Why has the fund underperformed so badly? In its search for cheaply priced stocks, Neuberger & Berman Guardian invested heavily in financial stocks, which were hammered during the quarter.

Also, because the biggest large-cap stocks had become so pricey recently (at least in the months leading up to this correction), Guardian invested in smaller companies in its large-cap universe.

But that turned out to be a bad move, at least so far. In recent months as well as years, larger stocks have performed better than smaller ones.

Year-to-date, the fund is down 16.9%, while its peers are down only 3.1%. And over the last three years, the fund has gained just 4.6% a year on average. That’s about a third what the typical large-cap value fund returned.

Large Blend

Fidelity Magellan

3rd Qtr: -11.1

Comments: In case you haven’t noticed, the nation’s largest mutual fund--and the most popular fund among the nation’s 401(k) investors--is back.

Over the last three months, Magellan lost slightly less than the typical large blend fund. And year-to-date, the fund is up 5%. That may seem modest, but those returns are more than twice that of the typical large-cap blend fund.

To be sure, on a three-year basis the fund is still lagging. But remember, manager Robert Stansky has only been in charge of the fund since 1996. And in that time he’s made some astute calls, especially with health-care stocks.

Fidelity Growth & Income

3rd Qtr: -8.3%

Comments: As it did last October, this $38-billion fund held up significantly better than its peers during the third quarter.

Here’s why: Fidelity Growth & Income sticks with big blue-chip names like General Electric and Merck but tends to stay clear of many of the technology land mines that hurt its peers. Indeed, only 8% of the fund is invested in high-tech.

So how does the fund grow? In recent years, it’s made good bets on big pharmaceutical stocks, which account for close to a fifth of its assets.

Year-to-date, Growth & Income is up 6.5%, more than three times the category average. Over the last three years, it’s up an impressive 21.4% annually.

Mid-Cap Growth

PBHG Growth

3rd Qtr: -26.2%

Comments: This $4-billion fund is no longer the best in its category. Indeed, it’s not even as good as the average mid-cap growth portfolio.

Over the last three months, it’s plunged about 50% more than its average peer.

Unfortunately, PBHG’s quarterly performance isn’t an anomaly. Year-to-date, the fund has lost 21.2%. And over the last three years, it’s down 2.7% annually, while the typical mid-cap growth fund is up 8.4%.

Obviously, you can’t chalk this up to the fact that the market has favored large-cap stocks over the smaller names that manager Gary Pilgrim likes.

Putnam New Opportunities

3rd Qtr: -18.9%

Comments: Sure, this fund lost more than the typical mid-cap growth portfolio. You can blame part of that on some individual stock holdings, like Cendant and Computer Associates.

But don’t be shortsighted with this fund. By holding on to its winning stocks as they rose, this $10-billion portfolio has gradually gotten bigger over the years. And in recent months, Wall Street has rewarded funds that invest in larger stocks, while punishing those that invest in small caps.

The result: New Opportunities is up 11.7% a year for the last three, while the average mid-cap growth fund is up just 8.4%.

Foreign

Scudder International

3rd Qtr: -14.4%

Comments: By sticking with companies in Europe and largely avoiding Asia and Latin America, this $3-billion fund managed to lose less in the third quarter than other funds that invest abroad.

Scudder International has adopted the winning formula that a number of Scudder’s foreign and world funds use: It invests primarily in big blue-chip companies that are restructuring their operations to cut costs, increase earnings and become more competitive.

Year-to-date, the fund is up 3.3%, while its peers are down 3.4%. Over the last three years, its up 8.5% a year, while its peers are up just 5.3%.

Templeton Foreign

3rd Qtr: -17.2

Comments: More than the typical foreign stock fund offered in 401(k) plans, this $14-billion fund has been willing to hunt for bargains in some Asian and Latin American countries.

Perhaps this accounts for the fact that while the typical foreign fund was down 16.3% during the third quarter, Templeton Foreign lost slightly more.

And because of earlier bets the fund made in places like Hong Kong, Templeton Foreign is down 15.1% year-to-date, about five times as much as its average peer. Is it time to give up on this fund? If you’re concerned and there’s a safer choice in your 401(k) plan, maybe.

But if there isn’t a better option--or if you invested here because you wanted a slightly more aggressive foreign fund than, say, Scudder International--then you might want to stay.

Over the last three years, Templeton Foreign has advanced 2.3% a year, versus 5.3% for its peers.

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Performance of Largest and 401(k) Favorite Mutual Funds

The largest U.S. mutual funds--popular with investors and often found in company 401(k) plans--generally weathered the third quarter better than the average domestic fund. Here are the largest funds ordered by third-quarter performance, as well as a selection of funds ordered by third-quarter performance, as well as a selection of funds common in Southern California 401(k) plans. Included are returns for other periods and their category and “star” ratings from Morningstar. Rating descriptions and category definitions can be found with the special tables beginning on C12.

Largest Funds

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Obj Cat 3-yr Total % Return Category Cat Rtg Star 3rd Q YTD 3-yr Vanguard Wellington DH 5 4 -4.2 4.3 16.5 American: Inc Fund of Amer DH 4 3 -4.9 1.1 14.6 Fidelity Puritan DH 4 4 -6.7 3.5 14.9 American: Washington Mut Inv LV 5 5 -7.0 4.7 21.9 American: Invest Co of Amer LB 3 4 -7.4 4.8 19.6 Fidelity Advisor T Grow Opp LV 4 4 -7.7 2.9 18.1 Fidelity Growth & Income LB 4 5 -8.3 6.5 21.4 Fidelity Contrafund LB 3 4 -9.4 6.3 17.4 Vanguard Index 500 LB 5 5 -10.0 6.0 22.5 Putnam A Fund for Grow & Inc LV 3 3 -10.1 -1.3 16.7 Putnam B Fund for Grow & Inc LV 3 3 -10.2 -1.8 15.8 American: New Perspective WS 4 4 -10.2 6.5 13.3 Janus LB 3 4 -11.0 8.1 17.8 Fidelity Magellan LB 1 3 -11.1 5.0 13.5 American Cent-20th C Ultra lv LG 2 3 -11.8 9.4 14.9 Vanguard Winsor II LV 5 5 -11.8 1.2 20.9 Fidelity Equity-Income II LV 3 4 -12.0 2.0 17.1 Fidelity Equity-Income LV 3 4 -12.9 -3.1 17.2 American: EuroPacific Grow FS 4 4 -13.6 -2.0 8.8 Vanguard Windsor I LV 1 2 -19.5 -11.1 11.0

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Common Southern California 401(k) Funds

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Obj Cat 3-yr Total % Return Category Cat Rtg Star 3rd Q YTD 3-yr Pimco Total Return Fund Inst CI 5 5 5.0 9.4 10.0 American: Balanced DH 4 3 -3.6 2.3 13.9 Vanguard/Wellington DH 5 4 -4.2 4.3 16.5 Dodge & Cox Balanced DH 3 3 -7.9 -1.7 12.5 Fidelity Blue-Chip Growth LB 2 3 -8.1 9.3 17.0 Fidelity Growth Company LG 2 3 -8.3 5.0 13.6 Vanguard U.S. Growth Portfolio LG 5 5 -9.4 12.2 23.9 T. Rowe Price Intl Stock FS 3 4 -13.7 -1.9 6.3 Scudder International FS 4 4 -14.4 3.3 8.5 Fidelity Diversified Intl FS 5 5 -14.5 -0.7 11.9 Putnam A Voyager MG 5 2 -16.2 -2.1 14.1 Templeton I Foreign FS 2 3 -17.2 -15.1 2.3 Fidelity Overseas FS 3 4 -17.4 -4.3 7.0 Putnam A New Opportunities MG 4 2 -18.9 -3.9 11.7 T. Rowe Price New Horizons MG 2 2 -21.0 -14.7 5.2 Neuberger & Berman Tr Guard LV 1 2 -26.2 -16.9 4.5 PBHG Growth MG 1 1 -26.2 -21.1 -2.7

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Source: Morningstar Inc.