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Two Fitting Funds for Your IRA

Christine Benz

Christine Benz: Hi, I'm Christine Benz from Morningstar. It's tax time and that means you have until April 15th to fund an IRA for the 2008 tax year. With that in mind, I thought it would make sense to sit down with some of Morningstar's most senior analysts to get their picks for funding an IRA.

So, here today with me is Russ Kinnel. Russ is Morningstar's director of fund research, and he's also editor of Morningstar FundInvestor. Russ, thanks for joining me.

Russ Kinnel: Good to be here.

Christine Benz: Now, one of your picks, Sequoia SEQUX is a fund I like a lot, too, and it's one of the many funds that just reopened last year. So, talk about why you think Sequoia is such a great fund pick.

Russ Kinnel: This is one of the great all time funds, and it reopened last year after 25 years of being closed because they were slowly losing some shareholders. But, it's still a small fund and just a great fund in the Warren Buffett mold. They have ties to Buffett. They are long term investors who look for really good companies with low debt, and low debt, obviously, is a good place to be right now, given how difficult the situation is for banks.

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Christine Benz: This is the kind of fund, too, that I would think could be a core fund pick for investors with a variety of time horizons. Even if you are someone with a relatively short time horizon, it is a fund that is going to be, maybe, more stable than some other stock funds.

Russ Kinnel: Yeah, relative to other stock funds, it is a pretty stable fund. It's also just a great long term fund. They have a lot of stability in management, in style. You can buy this fund, put it away and feel confident that when you come back 10 or 20 years later you will have grown your investment.

Christine Benz: So, your other fund pick, I think, takes really good advantage of the fact that with an IRA you don't have to pay taxes from year to year. Tell us why you like Harper Real Return HARRX.

Russ Kinnel: Harper Real Return is a TIPS fund run by PIMCO, and TIPS funds are among the least tax-efficient funds out there because of the mechanism that adjusts for inflation. So, if inflation rises, the value of the bonds is increased and you have to pay taxes on that right away.

It's not very attractive in a taxable account but in a tax sheltered account it is a great investment. One of the dangers to retirement money is that inflation will eat away at it, and with world governments printing a lot of money right now, there is a great risk that after the recession we are going to have a lot of inflation. It might not happen, but if it does this is a really valuable fund to own.

Christine Benz: So, TIPS, Treasury Inflation-Protected Securities, some might say "Well, they're kind of a commodity." What value do you think PIMCO adds in this space?

Russ Kinnel: Well, PIMCO is able to add value. There's different types of inflation-protected securities, and they could choose among them. They could choose among different durations. They are able to make some adjustments, and PIMCO obviously over the long haul has proven a very good manager, and this fund is cheap so they don't have to add a lot of value.

I also like other TIPS funds like Vanguard Inflation-Protected Securities VIPSX, so there's other good TIPS funds, too, but I think PIMCO is just one of the best bond managers out there.

Christine Benz: OK, Russ, thanks so much. That sounds like a great pick.

Russ Kinnel: You're welcome.

Christine Benz: Thanks for joining us. I'm Christine Benz for Morningstar.