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March's Mutual Fund Red Flags

Are these three funds chasing returns?

Morningstar Analysts, 03/14/2006

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This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.

While a number of fund managers are cutting back on the market's hottest areas, such as small- and mid-cap stocks and the energy sector, on valuation concerns, others are wading further into those corners. Is this cause for concern?

Here's our take on three such funds.

White Oak Select Growth WOGSX

We took this volatile bull-market darling to task in early 2004 for its huge bet on technology stocks, which had enjoyed a big run-up in 2003. Shareholders have since paid the price for that wager: As holdings such as Cisco Systems CSCO declined sharply, the fund posted losses in 2004 and 2005, finishing near the bottom of the large-growth category each year. More recently, lead manager James Oelschlager has made an effort to broaden the portfolio beyond its typically exclusive focus on tech, financial, and health-care stocks.

But while we think a move toward diversification might help smooth the fund's notoriously feast-or-famine returns, it appears that management still isn't paying much attention to price risk. In 2005's fourth quarter, for example, the fund added names from other sectors such as energy-services provider Baker Hughes BHI, media IPO Google GOOG, and managed-care concern UnitedHealth Group UNH--all of which had staged spectacular rallies in recent years.

The early results aren't encouraging. The latter two stocks are down substantially from their recent highs, and the fund is lagging most of its peers again for the year to date through Feb. 21. What's more, Oelschlager has made room for those hot stocks by trimming beaten-down tech firms like Dell DELL and semiconductor maker Maxim Integrated Products MXIM. As such, we think the case for this difficult-to-use fund has become even weaker.

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