PRICING

20 Best Mutual Funds

Inc.'s finance editor offers readers a list of specific mutual funds that are the right choice for company owners.
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The perfect choices for company owners only -- and how to profit from them

Business owners, here's a wake-up call too important to ignore: it's time to start saving for your family's financial future. The way to begin is by recognizing two hard realities.

One, you can't count on your company to grow quickly enough -- or become profitable soon enough -- to help you cope with life's financial hurdles: sending the kids to college, supporting aged parents, saving for retirement, or whatever your particular challenges are. That means you need an alternative to the game plan that begins, "When I earn $10 million by taking my company public, I'll be able to . . . "

Two, as a business owner, your financial profile is so completely different from most other people's that you cannot simply follow the same old, same old you may read about in personal-finance magazines or guidebooks. Your biggest investment -- the one in your company -- is both illiquid and highly risky, the worst of all worlds. You need to develop a personal-finance strategy for your family that helps you deal with those problems while offering an upside potential. That's not easy to find, but it can be done.

Mutual funds are a good place to start because they offer you the opportunity to diversify quickly into a range of investments. For a business owner who may have little interest in -- and who certainly has little time to devote to -- learning the ins and outs of the investment world, mutual funds provide easy access to the ideas of some pretty savvy portfolio managers. They are a relatively safe way to get your feet wet in the sometimes choppy waters of stock and bond markets, because portfolio managers can hedge against the kind of volatility we witnessed this summer, in a way that individual investors with limited resources usually cannot.

There are thousands of funds, running the gamut from those that specialize in different types of stocks or bonds or overseas investments to various combinations of the three. With a universe that vast, you have plenty of choices. But too many options can also be confusing. And it's risky to choose any fund just because it has a good recent record -- especially if you haven't first taken into account your own special needs as a business owner.

* * *

The Inc. 20
To guide you in your search, we've put together Inc.'s first-ever list of the 20 best mutual funds for entrepreneurs. It's a list you won't find anywhere else -- fine-tuned for the special needs of business owners, with some help from financial experts who understand just how different Inc.'s readers are from the general population when it comes to investment needs.

For help in developing the list, we turned to a 12-year-old company that understands entrepreneurship firsthand. Morningstar Inc. is a Chicago-based research firm and Inc. 500 company in the business of providing comprehensive coverage of more than 7,000 mutual funds for institutional and individual investors.

Morningstar screened its database for stellar mutual funds that met the magazine's five-point criteria:

1. Low minimum investments. Saving money is tougher for most business owners than it is for people with steady paychecks. So we eliminated funds whose investment thresholds were so high that only the best-established entrepreneurs could hope to enter them. Some of the funds listed here will accept initial investments of just $50 to $100 if you're willing to commit to a monthly investment schedule.

2. Low volatility. Because as business owners, most of you already have all the risk you can handle in your companies, our goal was to look for funds for which the chances of monthly downturns would be rare. (That way, if a worst-case scenario unfolds, as it sometimes does, and you need to cash in a mutual-fund investment to raise money for your business, you'll be less likely to experience an investment loss.) The funds we have chosen have historically held up well during periods of market volatility. All the funds listed below have Morningstar risk ratings below 1.00. (The 1.00 rating represents the average monthly downside risk experienced by funds in their particular category: the lower the number, the lower the risk.)

3. Unrestricted participation. Believe it or not, some of the best mutual funds are available only to residents of certain states or to people who belong to certain religious, work, or other organizations. The Inc. 20 are open to anyone with an interest in investing.

4. Low or no load. In the world of mutual funds, load means fee. And although it's not always true that funds charging their customers the lowest fees produce the best overall results, one fact is undeniable: when you don't have too much money to invest, it's crazy to waste some of it on fees. There are great mutual funds with bare-bones fees.

5. Top five-year-performance records. Often mutual-fund lists focus on the most recent year's hottest funds. But business owners know better than anyone that success is defined by the ability to turn in consistently good performances, year in and year out. Five years has been defined by investment experts as the best time horizon to prove a fund has long-term profit capabilities and can handle different investment cycles. The best news about our list is that our emphasis on low risk and low investment minimums hasn't required us to make sacrifices in terms of our funds' performance records.

To find out how well our top 20 performed, check two details in the list, the Morningstar rating (assigned on a score of 1 star to 5 stars, a relative rating based on how the funds balance risk and returns) and the total return annualized over five years. (Although 12-month performance records were not one of the factors we screened for, we've included them so that you'll have up-to-date information. The ending date for the five-year- and 12-month-return periods is May 31, 1996.)

After screening for those five factors, we applied some subjective standards, eliminating, for example, a few funds on the basis of their tiny size. We also made some judgment calls about the kinds of mutual funds we would focus on. While there are far more types than most people would imagine possible, many (like precious-metal, natural-resource, and real-estate-based funds) are probably too risky for entrepreneurs who are already taking their bumps with their businesses. So we decided to focus on five categories with somewhat lower risk profiles: growth stocks, short- to intermediate-term bonds, aggressive (or small-cap) stocks, long-term bonds, and international stocks.

* * *

A step-by-step guide to using the list
If 20 funds seem too many to choose among, don't throw up your hands in despair. Before starting, identify your investment needs according to your company's stage of development.

Stage one is fairly simple to recognize. Your company either is a start-up or is still so young or vulnerable that cash flow can get crazy sometimes. Your own paychecks are far from predictable, and it's tough for you to save a dime (without worrying about having to plow it back into your business).

That's the time to take baby steps as an investor. It's certainly a good idea to start trying to put aside at least a small sum, preferably in an investment that's as different from your company as possible. But let's be realistic. Your fledgling company will have to stabilize to some degree before that can happen.

When you're ready to start, choose one or two funds that will accept small initial purchases or small automatic monthly investments, in which a set amount is deducted from your checking account. With all the risks you face in your young company, you need a safe mutual-fund investment. Stick to the "short- to intermediate-term bond" and "growth stock" fund categories on our list, and make small investments whenever you can. If monthly savings are too difficult at this stage, try to make a larger, year-end investment at bonus or tax-refund time.

Stage two is harder to identify because it creeps up on many business owners. Think of this stage as stability. You've started paying yourself a regular, maybe even competitive, salary; your company's cash flow is steady enough that you probably won't need to raid your personal savings when unexpected glitches occur.

"When your company begins to seem stable enough that you can envision leaving your investment in place for five years or longer, you can carry out a full-fledged mutual-fund investment strategy," advises Steven Enright, a fee-only (no commissions) investment adviser and certified financial planner based in River Vale, N.J. At this point, you should try to invest a fixed sum each month, ideally by spreading it among a range of funds with different investment goals.

By investing in three to five mutual funds, chosen from different fund categories, Enright explains, business owners can carry out a full-scale diversification campaign. That's important because the more diversified your investments are, the more you're protected against downturns in any one sector of the economy or investment market. (Here's another quick tip: If your goal is, as it should be, to achieve diversification, don't make the mistake of choosing multiple funds within the same category on the list. That will concentrate your risks.)

Stage three is when your company has a solid record of growth and profitability. You're finally coming close to paying yourself what you're worth. Those end-of-the-year bonuses are the stuff you've always fantasized about. Best of all, your company's creditworthiness is so well established that when cash crunches happen -- as they always will -- you can simply tap your credit line. Your savings and investments are finally safe.

This is the time to complete your mutual-fund portfolio. Enright recommends choosing 10 funds -- 2 from each investment category. In the interests of complete diversification, make sure the funds you select represent a broad range of investment styles.

This article launches Inc. 's new Personal Portfolio section, in which finance editor Jill Andresky Fraser (incfraser@aol.com) looks at specific money-management issues facing company builders.


GROWTH STOCK FUNDS

Think of this as a catchall category, whose funds invest mainly in the stock of large, well-capitalized U.S. companies.

William Blair Growth

With a heavy emphasis on controlling risks -- even while looking for growth opportunities -- this fund invests in companies with stable, predictable earnings and reasonable stock valuations. It's cautious but quite profitable, perhaps because William Blair relies on two portfolio managers.

Morningstar rating: 5 stars

Total 12-month return: 34.92%

Total 5-year annualized return: 18.25%

Morningstar 5-year risk rating: 0.83

Smallest initial purchase: $5,000

Smallest automatic investment: $1,000

Telephone number: 800-742-7272

Mutual Qualified

With a goal of achieving capital appreciation, this fund invests primarily in undervalued common stock, preferred stock, and debt securities. It definitely takes some chances, including investments in so-called junk bonds, but Mutual Qualified has historically outperformed most of its competitors.

Morningstar rating: 5 stars

Total 12-month return: 22.98%

Total 5-year annualized return: 18.08%

Morningstar 5-year risk rating: 0.45

Smallest initial purchase: $1,000

Smallest automatic investment: $1,000

Telephone number: 800-553-3014

Janus Growth & Income

Just as the name indicates, this fund makes money for its investors by looking for long-term growth of capital and maximum current income. Typically, 25% of investments are targeted for each of those two categories, with other investments consisting of foreign stocks, options, futures, and other securities.

Morningstar rating: 4 stars

Total 12-month return: 39.73%

Total 5-year annualized return: 18.03%

Morningstar 5-year risk rating: 0.84

Smallest initial purchase: $2,500

Smallest automatic investment: $500

Telephone number: 800-525-8983

Strong Schafer Value

Looking for long-term capital appreciation, this relatively unknown fund focuses on companies with market capitalizations of at least $250 million. It looks for companies with healthy financials and relatively low stock prices compared with their intrinsic value. The fund limits itself to only about 35 holdings.

Morningstar rating: 4 stars

Total 12-month return: 25.75%

Total 5-year annualized return: 17.64%

Morningstar 5-year risk rating: 0.80

Smallest initial purchase: $2,500

Smallest automatic investment: $50

Telephone number: 800-368-1030


SHORT- TO INTERMEDIATE-TERM-BOND FUNDS

Holdings in these funds are limited to bonds with maturities of less than 10 years, a conservative investment category.
Harbor Bond
This fund tops its category because of a successful balancing act between high-quality domestic and foreign bonds (which add up to at least 65% of assets) and riskier debt issues, including mortgage-backed securities, which spice up the profit potential.

Morningstar rating: 5 stars

Total 12-month return: 5.93%

Total 5-year annualized return: 9.44%

Morningstar 5-year risk rating: 0.90

Smallest initial purchase: $2,000

Smallest automatic investment: $500

Telephone number: 800-422-1050


Strong Government Securities
At least 80% of this fund's assets go into U.S. government securities. What's unusual is where the remaining 20% goes: corporate debt, private-placement investments, and even a sprinkling of derivatives. Think of this as a walk on the (slightly) wilder side of intermediate-term-bond funds.

Morningstar rating: 5 stars

Total 12-month return: 4.05%

Total 5-year annualized return: 9.20%

Morningstar 5-year risk rating: 0.94

Smallest initial purchase: $1,000

Smallest automatic investment: $50

Telephone number: 800-368-1030


Stein Roe Income
The big goal here is current income, so this fund aims for a boost from junk bonds. Don't get scared off, though, by this fund's aggressive stance. At least 60% of its assets go into safer, investment-grade debt securities. Even the junk bonds tend to fall into the BB (that is, a higher-rated) category.

Morningstar rating: 5 stars

Total 12-month return: 5.47%

Total 5-year annualized return: 9.15%

Morningstar 5-year risk rating: 0.92

Smallest initial purchase: $2,500

Smallest automatic investment: $1,000

Telephone number: 800-338-2550

Stein Roe Intermediate Bond
More cautious than its sister fund, this one aims for income plus capital preservation. It reserves 60% of its assets for corporate debt rated A or higher, U.S.-government obligations, and high-grade commercial paper.

Morningstar rating: 4 stars

Total 12-month return: 5.35%

Total 5-year annualized return: 7.65%

Morningstar 5-year risk rating: 0.85

Smallest initial purchase: $2,500

Smallest automatic investment: $1,000

Telephone number: 800-338-2550


AGGRESSIVE STOCK FUNDS

Yes, entrepreneurs, this is the sector you know best because it consists of small-capitalization, growth-oriented stock investments.
Stein Roe Capital Opportunities
The hunt is on here for companies with the potential for rapid earnings growth. But the fund has a cautious bent, as witnessed by its predisposition to make bets on companies that have already established good growth records. As much as 35% of its assets can go into debt securities.

Morningstar rating: 5 stars

Total 12-month return: 84.88%

Total 5-year annualized return: 26.50%

Morningstar 5-year risk rating: 0.89

Smallest initial purchase: $2,500

Smallest automatic investment: $1,000

Telephone number: 800-338-2550


Baron Asset
Take "small-cap" here with a grain of salt: this fund makes investments in companies with capitalizations of $100 million to $1.5 billion. Investments have one thing in common: they're undervalued, according to this portfolio manager.

Morningstar rating: 5 stars

Total 12-month return: 51.98%

Total 5-year annualized return: 22.31%

Morningstar 5-year risk rating: 0.93

Smallest initial purchase: $2,000

Smallest automatic investment: $500

Telephone number: 800-992-2766

Acorn
This fund aims for long-term capital appreciation from investments in stocks its portfolio manager considers exceptional. It has a reputation for idiosyncratic stock choices. What makes a stock exceptional enough to qualify: typically, strong market franchises and a connection to broader economic trends.

Morningstar rating: 5 stars

Total 12-month return: 32.44%

Total 5-year annualized return: 19.79%

Morningstar 5-year risk rating: 0.85

Smallest initial purchase: $1,000

Smallest automatic investment: $1,000

Telephone number: 800-922-6769


Meridian
The goal is long-term growth from stocks that meet a beauty-pageant list of criteria -- revenues below $750 million, projected earnings and revenue growth of at least 15% during the next three to five years, strong market share, and high-quality management. About 20% of the fund's assets tend to stay in cash.

Morningstar rating: 3 stars

Total 12-month return: 28.94%

Total 5-year annualized return: 17.33%

Morningstar 5-year risk rating: 0.98

Smallest initial purchase: $1,000

Smallest automatic investment: $1,000

Telephone number: 800-446-6662


LONG-TERM-BOND FUNDS

These funds concentrate on bonds with maturities of 10 years or longer, making them a higher-risk investment.
Strong Corporate Bond
The fund seeks to maximize current income by making some fairly aggressive investments in taxable long-term bonds, as well as dividend-paying common stocks (typically utilities). Be prepared -- as much as 25% of its holdings can go into junk bonds and other investments that use various option techniques.

Morningstar rating: 4 stars

Total 12-month return: 6.88%

Total 5-year annualized return: 10.70%

Morningstar 5-year risk rating: 0.88

Smallest initial purchase: $1,000

Smallest automatic investment: $50

Telephone number: 800-368-1030


Invesco Select Income
The target is a high level of current income, so this fund makes some risky plays. Only 50% of its assets must go into investment-grade corporate securities (the rest can go into debt rated as low as B); U.S. government securities help balance out the mix. It's particularly vulnerable when investors get recessionary jitters.

Morningstar rating: 5 stars

Total 12-month return: 5.16%

Total 5-year annualized return: 9.53%

Morningstar 5-year risk rating: 0.68

Smallest initial purchase: $1,000

Smallest automatic investment: $50

Telephone number: 800-525-8085


Babson Bond "L"
This one's a safer play for investors who want some measure of stability as well as current income. At least 80% of its assets go into U.S. government obligations and investment-grade corporate debt, with a smaller portion reserved for upper-end junk bonds or high-quality Canadian investments.

Morningstar rating: 4 stars

Total 12-month return: 3.72%

Total 5-year annualized return: 7.73%

Morningstar 5-year risk rating: 0.93

Smallest initial purchase: $500

Smallest automatic investment: $100

Telephone number: 800-422-2766


USAA GNMA
If you're a niche player at heart, consider this fund, which invests at least 65% of its assets in certificates of the Government National Mortgage Association. (That means mortgage-backed securities, which do have a tendency toward roller-coaster performance.)

Morningstar rating: 4 stars

Total 12-month return: 3.65%

Total 5-year annualized return: 7.31%

Morningstar 5-year risk rating: 0.84

Smallest initial purchase: $3,000

Smallest automatic investment: $1,000

Telephone number: 800-383-8722


INTERNATIONAL/WORLDWIDE FUNDS

These funds allow investors to diversify into international equities and bond offerings. Funds differ widely in countries and investment mixes.
Janus Worldwide
The heavy-duty research capabilities of this fund, which aims for long-term growth as well as capital preservation, have paid off by consistently identifying profitable industry trends abroad. Expect its portfolio to be distributed among at least five countries, including the United States, with investments in a range of securities.

Morningstar rating: 5 stars

Total 12-month return: 38.43%

Total 5-year annualized return: 20.48%

Morningstar 5-year risk rating: 0.72

Smallest initial purchase: $2,500

Smallest automatic investment: $500

Telephone number: 800-525-8983
Founders Worldwide Growth
This fund has a go-go trading style, with less attention paid to currency and country trends than to the search for stocks that are on their way up. The goal is long-term growth of capital, the investment vehicle is usually common stock, and diversification tends to fall into three or more countries.

Morningstar rating: 3 stars

Total 12-month return: 24.66%

Total 5-year annualized return: 15.04%

Morningstar 5-year risk rating: 0.93

Smallest initial purchase: $1,000

Smallest automatic investment: $50

Telephone number: 800-525-2440 USAA International
This fund's big selling point is its broad international exposure, with holdings typically spread over more than 30 countries. It has a great record of catching the wave in emerging markets. At least 80% of its assets go into stocks based outside the United States.

Morningstar rating: 3 stars

Total 12-month return: 19.71%

Total 5-year annualized return: 13.13%

Morningstar 5-year risk rating: 0.97

Smallest initial purchase: $1,000

Smallest automatic investment: $1,000

Telephone number: 800-382-8722

Twentieth Century International Equity
We're talking capital growth -- and this fund's two portfolio managers are betting heavily that it can come from Japanese stocks (in which 29% of its assets currently are invested). With a mandate to put at least 65% of holdings outside the United States, this is a fund that's not afraid to take some risks.

Morningstar rating: 3 stars

Total 12-month return: 17.13%

Total 5-year annualized return: 12.79%

Morningstar 5-year risk rating: 0.94

Smallest initial purchase: $2,500

Smallest automatic investment: $50

Telephone number: 800-345-2021

*Funds within categories are listed in the order of their five-year annualized returns. All information is as of May 31, 1996.

Last updated: Sep 1, 1996




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