4 good funds to buy in December

By Morningstar

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

Yet it's 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 month.

So 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 two-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. I'll share two of the first kind and two of the latter.

Harbor International Growth

Harbor International Growth (HIIGX) is enjoying excellent performance under manager James Gendelman, but it won't pay 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's 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 about 100% a year, because of 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

A midcap fund, FPA Paramount (FPRAX) 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.

Don't use it to fill a momentum-fund slot -- 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 to 1995 and 1999, respectively. They run a concentrated portfolio with low turnover.

Vanguard Tax-Managed International

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.

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Vanguard Tax-Managed International (VTMGX) is essentially an index strategy except that the portfolio doesn't perfectly match the MSCI EAFE foreign-stock index because of its loss-harvesting efforts. At an expense ratio of 0.20%, it's tough to beat.

(MSCI EAFE stands for Morgan Stanley Capital International Europe, Australasia and Far East.)

Vanguard Total Stock Market ETF

Exchange-traded funds have special tax advantages, which makes them very tax-efficient. Vanguard Total Stock Market (VTI, news, msgs) is one of the best, with an expense ratio of just 0.07%.

If 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 U.S. Broad Market Index ($MSCIBM.X), which is not too different from the Russell 3000 Index ($RUA.X), in that it is meant to track small-, mid- and large-cap stocks.

Money-market funds

If the four funds 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 your choice has made its capital-gains distribution.

Consider the stress that money-market funds are under these days and be sure to pick a low-cost fund from a dependable fund company.

Clarification on real-estate-funds story

Last week, I wrote about the massive launch of real-estate funds. I mentioned that Adelante had launched six this year, but I should have written that XShares launched six. The funds are named Adelante, but Adelante is actually just the index provider. XShares is the fund company behind them.

This article was researched and written by Russel Kinnel for Morningstar.

Published Dec. 17, 2007