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Four Great Funds You Can Buy in December

Don't hibernate until January--these four funds look good right now.

Russell Kinnel, 12/18/2007

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

It's capital gains payout season--a time when fund investors normally head for cover. After all, you don't want to buy a fund just before it makes a capital gains distribution.

Yet it's kind of tempting to buy when you get a big down day in the market, as has happened frequently of late. Fortunately, if you look closely you can find a handful of funds that are attractive and are not going to pay out capital gains this December. Thus, you can buy them right now, though of course these should be long-term investments held 10 years or more--lest anyone think I was predicting big three-week returns.

Essentially, there are two types of stock funds that make the grade: funds where good managers took over after a bout of poor performance under previous management and funds that are tax-managed. First I'll share two of the first kind and then two of the latter.

 Harbor International Growth HIIGX
This fund is enjoying excellent performance under manager James Gendelman, but it won't be paying out gains this year because of a slump before Gendelman took over. It's rare to find a foreign fund that's even remotely attractive and isn't awash in capital gains. Gendelman is part of Marsico Capital Management. You can see a longer track record for him at  Marsico International Opportunities MIOFX, but that fund is less attractive because it is making distributions in December and charges higher expenses. The approach here is to look for fast-growing companies in industries due for an upswing. The fund has fairly high turnover, typically around 100%, due to changing macroeconomic and company trends. Gendelman has also been a big fan of emerging markets--making this one of the more aggressive foreign funds around. Although the strategy sounds simple, doing it well isn't.

 FPA Paramount FPRAX
This mid-cap fund is an appealing play for those who invest through brokers. The fund sits on the border between blend and growth owing to its emphasis on clean balance sheets, strong returns on capital, and modest valuations. So, don't use it to fill a momentum fund slot but do use it to add value to your portfolio. Managers Eric Ende and Steve Geist have done a fine job here and at  FPA Perennial FPPFX, where their track records date back to 1995 and 1999. They run a concentrated portfolio with low turnover.

 Vanguard Tax-Managed International VTMGX
Vanguard's tax-managed funds have never paid out capital gains and that's particularly appealing overseas where most funds are making big distributions. They do that by keeping turnover low and realizing losses to offset any realized gains. This is essentially an index strategy except that the portfolio doesn't perfectly match the MSCI EAFE because of its loss-harvesting efforts. At an expense ratio of 0.20%, it's tough to beat.

 Vanguard Total Stock Market ETF VTI
ETFs have special tax advantages, which makes them super tax-efficient. This one is one of the best, with an expense ratio of just 0.07%. Provided that you are investing a lump sum rather than planning regular investments, this is an outstanding way to tap the markets for the long-term. This fund tracks the MSCI US Broad Market Index, which is not too different from the Russell 3000 in that it is meant to track small-, mid-, and large-cap stocks.

Money Market Funds
If the four funds that I've mentioned don't fit the bill and you have your heart set on something else, you can always stow your cash in a money market fund and wait until after it has made its capital gains distribution. Given the stress that money market funds are under these days, just remember to pick a low cost money market fund from a dependable fund company.

Russell Kinnel is director of mutual fund research with Morningstar.

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