Veteran mutual fund investors have learned there's more to fund selection than just picking the hottest fund and plowing money into it. Experience has taught them that today's hot fund could be tomorrow's loser. What matters most is consistent returns over time.
But in what kinds of companies must a fund invest its assets if it's looking for consistent returns over the long haul? The answer may surprise you.
The Fidelity Select Food and Agriculture Portfolio isn't the hottest-performing fund in the market today, but its track record makes it worth investigating. For the year ending October 31, 1998, the fund was up 17.91 percent.
Look back further, and the numbers are even stronger: For the past three years, the fund's total average annual return was 18.34 percent; over the past 10 years, 18.89 percent; and since the fund's inception in 1985, it has returned on average 19.42 percent per share each year to its shareholders, according to Fidelity Investments.
Although a fund's past track record doesn't guarantee its future performance, this fund invests its assets in a market sector that's been around forever and is so common it's easy to overlook: staples. "Staples" is the name given to Wall Street companies that make and/or sell things everyone uses regularly--food, beverages and soap, for example. "They're the products we really can't do without," says Scott Offen, the fund's portfolio manager.
And he's right. Look in your refrigerator or kitchen cabinets, and you'll probably find some of the brand names that are in the fund's portfolio: Coke, Pepsi, Campbell Soup and Sara Lee.
But the real beauty of staple companies goes beyond brand name recognition. Staples are considered "defensive" companies. That means these companies make the stuff that people will use no matter what's happening to the Dow Jones Industrial Average, the S&P 500 or NASDAQ. For instance, if the market--or the economy--is tanking, people might not go out and buy a new car, but they'll probably still buy a soda. So while lousy market or economic conditions could bring the share prices on staple companies down, the low per-unit cost of the products these companies sell generally gives them more staying power.
Offen likes to keep between 40 and 50 stocks in the Select Food and Agriculture Portfolio. The industries the fund favored at press time were food, with 13.1 percent of the fund's assets invested there, grocery/retail with 12.5 percent, beverages with 9 percent and tobacco with 8.2 percent.
This fund is not for those who want to invest in fast-growing companies, like many of the tech stocks, or for those who refuse to invest in tobacco companies. It's best suited for those who understand the valuable role defensive companies can play in a portfolio.
It's also for those who prefer chicken to steak. "Consumers like consistency," says Offen. "They'd rather buy chicken because they know it's low in fat and they know what it's going to taste like; they realize they aren't going to get the high and low experience they can with beef."
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill), Straight Talk About Investing for Your Retirement (McGraw-Hill), and 10-Minute Guide to Stocks (Macmillan).