Q. I have about a third of my investment portfolio in Strong Funds (tickers: sopfx, stvsx, stadx).   It bothers me that Richard Strong is accused of immoral if not illegal behavior. Cashing out would create tax problems. What should I do?

---R. P., by e-mail from Amarillo, Texas

  

A. With the tax rate on any long-term equity fund no higher than 15 percent, taxes shouldn't slow down any decision. I wouldn't hold my breath waiting for a still lower tax rate. This is as good as it gets.

If flaccid ethics aren't enough to cause you to redeem your shares, consider some other facts. According to Morningstar data, Strong Opportunity Fund (ticker: SOPFX) has been in the bottom half of its category for the last 3, 5, 10, and 15 years. You can do better.

Strong Ultra Short Income (ticker: STADX), an ultra short bond fund, was in the bottom 10 percent of comparable funds over the last three years and hasn't done better than the 50th percentile over the last 5 and 10-year periods. Again, you can do better.

The only fund you might miss (for its return) is Strong Government Securities (ticker: STVSX). It is a top performer--- never lower than the top 12 percent of intermediate government funds over the last 1, 3, 5, 10, and 15 years. It will be difficult, but not impossible, to replace. You can get the same Morningstar rating (5 stars) and comparable performance from Vanguard GNMA, Vanguard Intermediate Term U.S. Treasury, and Fidelity Mortgage Securities--- all no load funds with lower annual expenses as well.

Should your response be so harsh that you feel compelled to take your money from Strong Funds?

Yes, I think so. The fundamental duty of a fund management company is to act as a fiduciary. If they forget what that is---and the behavior that it requires--- nothing else counts.

Nothing. There are plenty of mutual fund companies out there that take being a fiduciary seriously.

  

  Q. Our financial advisor suggests that we put a large portion of my 401K in a managed stock fund.   (I've changed employers.) I asked if an index fund would not have less risk, considering that roughly 70% of fund managers fail to beat their appropriate indexes.  

Also, the index funds regularly have lower fees than managed funds.

The advisor suggests that the statistics are skewed by the fact that many funds run by brokerages, banks, and insurance companies are consistently poor performers, while a number of funds run by mutual fund managers regularly best the indexes.

Is this a logical way to view statistics?   Should one delve deeper into the fund rankings?  

You occasionally write that certain funds are consistently poor performers. Meanwhile, all fund documents state "past results are no assurance of future performance."

When I express my concern about fees she suggests that we compare total returns between the managed fund and a relevant index fund.   Even though the managed fund charges a 2.5% sales charge and has a higher expense ratio, the managed fund provides better returns after periods beginning in either 1982 or 1994. It appears that it may be worth paying the sales charge to benefit from a good manager. Of course our advisor also receives a commission on the managed fund.   Your comments?

---G.P., by e-mail

  

A. No, that isn't a logical way to view statistics. The question for the advisor--- or anyone investing--- is whether any particular factor has predictive value about future returns.

The "good manager" factor has been shown to have very limited value. Funds that were top performers in the past are as likely to be poor performers in the future as any other fund. In addition, the longer the period of investment, the greater the odds that a broad index fund will do better than managed competitors.

When you take that really long view--- like 20 years--- what you find is a handful of managed funds that have done better than the index. Most of them have very low operating expenses and low turnover. Several of the American Funds are in this group, as is Dodge and Cox Balanced and Dodge and Cox Stock.

While the historical track record has virtually no predictive content it has enormous tranquilizing value to both the broker and to his client. But in the long run, what truly counts is the drag of annual expenses, trading costs, and (if applicable) taxes.