Mutual funds to consider in 2008

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Last year's biggest mutual fund stories -- from a performance standpoint -- were the collapse of financial and real estate funds, the long-awaited resurgence of big-cap and growth funds over small-cap and value funds, and the continued strength in international funds. Experts say the outlook for 2008 is extremely uncertain, especially in light of the recent big jump in the unemployment rate to 5 percent from 4.7 percent. Their views vary widely, as do their fund recommendations, which range from blue-chip growth funds to more-esoteric ones investing in commodities and gold."There are significant risks to the economy as a result of the housing slowdown and the impact that might have on consumer spending. That's the primary driver of our GDP growth," says Jeremy DeGroot, chief investment officer with Litman Gregory Asset Management."On the other hand, valuations look reasonably attractive for large-cap companies, blue-chip names. Our base case is it's a muddle-through year where there are some great individual stock picking opportunities, maybe in the beaten-down financials. That may not play out in 2008, it may play out in two or three years," he adds. DeGroot says his firm is still assessing the impact of the latest unemployment report. For now, it has a "neutral" stance on U.S. stocks, which is neither bullish nor bearish. But it has shifted its U.S. stock exposure to large-cap from small-cap funds. (Cap refers to a company's capitalization or market value.) "We're coming off a period where small-cap stocks have been the darlings. Valuations for these blue-chip companies have come down," he says. DeGroot's favorite large-cap funds are TCW Select Equities, Brandywine Blue, Touchstone Sands Capital Select Growth and Harbor Capital Appreciation. He warns that you could lose money in these funds this year.On the international side, DeGroot says investors should have exposure to foreign funds, but "we don't think they are more attractive than domestic funds right now." His favorites include Harbor International, Lazard International Strategic Equity and Oakmark Global Select.DeGroot recommends bond funds for investors who are afraid of stock-market risk. He likes to invest with good managers and let them decide which bond sectors look attractive. For retail investors, he likes Loomis Sayles Bond and Harbor Bond. Harbor is a lower-expense version of Pimco Total Return. Both funds are run by Pimco's Bill Gross.DeGroot's firm does have a liking for one esoteric bond fund: Pimco Developing Local Markets, which invests in very short-term emerging-market debt. "The dollar has gone down hugely against the euro, the British pound and a lot of these developed currencies, but it hasn't declined much against developing-market currencies," DeGroot says. This fund is a bet that the dollar will fall relative to emerging-market currencies.For diversification and inflation protection, his firm has 3 percent of its assets in Pimco Commodity Real Return Strategy. This unique fund invests in a broad basket of commodity futures, backed by inflation-indexed securities. It's a volatile fund, he warns, but "the upside is that when stocks and bonds are having poor years, commodities historically have had very strong returns." This fund also avoids the stock-market and management risk you get in funds that invest in natural resource companies.Mark Salzinger, publisher of the No-Load Fund Investor, says, "I think we are going to have a difficult year. We have increasing inflation along with a slowing economy. I don't think it's going to be terrible, but I think we will skate around zero growth for the first and second quarters. I don't think the Fed can cut short-term rates a lot without hurting the dollar and causing inflation down the line."If he had fresh money to invest, Salzinger says he'd put it in "areas of the world stock market that can do relatively well in the environment I just predicted. The trick is to pick parts of the global markets that are not too expensive."Sectors that generally do well in a slowing environment are utilities, consumer staples and health care. The first two are already pricey. Health care is cheaper than it should be because it has political and patent-expiration risk, and U.S. companies have a paucity of good products in the pipeline.Even so, Salzinger says he would invest in T. Rowe Price Health Sciences, which focuses on underserved or undertreated diseases such as Alzheimer's, hepatitis B, HIV, cancer and diabetes.E-mail Kathleen Pender at kpender(at)sfchronicle.com. (Distributed by Scripps Howard News Service, www.scrippsnews.com.)