Q–I’m interested in small-cap stock funds because I think they’ll do better than large-caps. What are the prospects and which funds have performed the best?
A–Small-capitalization stocks have been on a roll, causing investors such as yourself to think small again.
Stock funds that specialize in them have outperformed large-cap funds this year and are attracting new assets. The downside is that they’re likely to take a bigger hit than their larger brethren should the overall market tumble.
“One of the appropriate uses of small-cap funds is a 401(k) retirement plan, since it has long-term goals that overcome shorter-term volatility,” noted Jon Teall, research coordinator for Lipper Analytical Services. The average small-cap stock fund is up 36 percent in total return over the past 12 months, according to Lipper.
The top-performing funds in total return over 12 months have been:
– TCW/DW Small Cap Growth Fund from Dean Witter, New York; $196 million in assets; declining back-end “load” (sales charge); $1,000 minimum initial investment; up 77 percent.
– Smith Barney Special Equities Fund, Class A, New York; $441 million; 5 percent load; $1,000 minimum; up 75 percent.
– Alliance Quasar Fund, Class A, Secaucus, N.J.; $242 million; 4.25 percent load; $250 minimum; up 69 percent.
– Compass Small Cap Growth Fund, Class A, Boston; $18 million; 4.5 percent load; $500 minimum; up 66 percent.
– USAA Aggressive Growth Fund, San Antonio; $579 million; no load; $3,000 minimum; up 64 percent.
Q–Thank you for the information on Series EE savings bonds in your column. What are the advantages of using them to finance a child’s college education?
A–There are pluses, but you must understand the details.
First of all, U.S. savings bonds used to take advantage of the special educational benefit program must be registered in the name of the parent taxpayer. The child cannot be the owner.
When bonds are redeemed and proceeds go to pay for tuition and fees at recognized colleges and post-secondary schools, the parents may be eligible to exclude all or part of the interest income from their income for tax purposes. This only includes bonds issued since the beginning of 1990. In 1996 for parents filing a joint return, everything can be excluded up to a modified adjusted gross income of $65,250. There is a proportional schedule for the amount that can be excluded, which phases out when income reaches $95,250. For single filers, all can be excluded up to $43,500, with the phaseout at $58,500.
“Keep records, because when bonds are cashed in at college time, the full amount of interest is reported to the IRS,” said Peter Hollenbach, a spokesman for the Bureau of the Public Debt in Washington, D.C.
Q–I’m 29 years old and have $10,000 in my individual retirement account. In a contrarian move, earlier this year I shifted it all into Scudder Japan Fund. What’s the outlook?
A–While I’m not wild about putting all of your eggs in one nation’s basket, there has been a strong recovery in the Japanese market and you can’t really label yourself a contrarian anymore.
The $502 million Japan Fund was up 5.78 percent the past 12 months to rank in the lower one-fourth of all Pacific stock funds. Its three-year annualized return of 2.82 percent is in the lower 5 percent of its peers.
On a brighter note, this no-load fund with a $1,000 initial purchase requirement has placed near the top of its group in early 1996.
Emphasizing medium-size companies, the fund was recently heavily invested in manufacturing, financial and consumer stocks.
“While a fund investing exclusively in Japan does offer some diversification, it probably isn’t best to put more than a small percentage of your assets into one,” cautioned Cebra Graves, analyst with the Morningstar Mutual Funds investment advisory. “Most foreign funds offer some Japanese exposure anyway, so I’d suggest a good diversified international fund.”
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Andrew Leckey, who co-anchors the “Today’s Business” program on the CNBC cable television network each weekday from 5 to 7 a.m., answers questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” Suite 367, 76 N. Maple Ave., Ridgewood, N.J.
