Worthy Funds Hiding in Flawed Categories

As my colleague Christine Benz noted in a recent column, beginning investors--and even more sophisticated ones--can simplify their efforts by passing over certain fund categories entirely. That's an excellent point; after all, with more than 17,000 funds out there to choose from, you can do yourself a favor by focusing most of your efforts on core funds.

Even in less-worthwhile categories, though, some gems await for those of you willing and able to give them a look. Here are a few noteworthy funds hiding in categories that, as a whole, we're not overly enthusiastic about.

World Stock
Rather than truly assembling the best choices available from all over the world in one cohesive effort, too many world-stock funds simply take a U.S.-stock portfolio from the firm's domestic manager and a foreign-stock portfolio from the international manager and then glue them together. Such funds typically have high costs, as well. However, it would be wrong to ignore all funds in the group. Besides the handful of Analyst Picks in the category, there's the recently reopened  Vanguard Global Equity (VHGEX), which boasts a strong long-term record and, of course, low costs. In fact, beginning investors who can scrape together the $3,000 minimum might find this an appealing choice as their sole fund until they have the means to fund a broader portfolio. Not only does it provide such a buyer with exposure to a wide variety of domestic and foreign companies in a single offering, but its value leanings and tendency to keep individual positions small limits the chances of severe losses, which might induce beginners to pull out their money and head for the nearest savings account.

Multisector Bond
This category is similar to the world-stock group in that it makes a lot of sense in theory; most people could probably use a diversified bond portfolio in one package. In reality, though, the bulk of these offerings are underwhelming performers that charge too much. But if you write off the entire category, you'd be missing out on  Loomis Sayles Bond (LSBRX), where Dan Fuss and Kathleen Gaffney have racked up an outstanding long-term record by taking full advantage of the multisector format. In recognition of their success, we recently chose them as runners-up for Fixed-Income Manager of the Year for 2004. (Fuss already has one such award to his credit, having won it outright in 1995.) Another worthwhile option in this category:  T. Rowe Price Spectrum Income (RPSIX), a fund of funds that, to its credit, does not charge an overarching fee on top of the expense of its underlying funds.

Communications
Most sector funds are unappealing for simple reasons--they may duplicate your other holdings, they tend to be costly, and they can too easily backfire on those of us who think we have a knack for knowing exactly when to get into particular slices of the market and when to get out. And the communications area is, to say the least, highly volatile. Yet one fund that's worth a look is  T. Rowe Price Media & Telecom (PRMTX). As we noted when we profiled it in a Fund Spy column in 2003, by taking full advantage of the fund's broad mandate and simply making smart decisions, manager Rob Gensler has made this offering into a choice that's tough to argue against. Be careful, though: It still can be volatile. Moreover, the fund is coming off great gains in both 2003 and 2004, so don't expect it to keep up such a rip-roaring pace.