Caution urged in potentially rocky year

In mutual fund investing, mid-cap growth funds provided resilient leadership in 2007 with a 16 percent average return, according to Lipper Inc.

But now, as fund investors formulate their personal strategies for a hazy 2008, the best that can be said is that it looks like a textbook year for overall diversification.

Growth funds do look more promising than value funds, some analysts say, while mid- and large-cap funds should have the edge over small-cap funds. Yet experts aren't anticipating they'll be making any huge shifts to capitalize on potential good news. Better to be safe than sorry.

"No one in the marketplace seems to have any conviction whatsoever about 2008 because no one is clear about the U.S. economy's direction or its potential effect on global markets," said David Hollond, co-manager of American Century Heritage Fund. "However, as a mid-cap fund, we are attractive for investors with large-cap holdings seeking to diversify — since there is less risk with mid caps than with small caps."

The $3.2 billion American Century Heritage Fund (TWHIX) rose 35 percent over the past 12 months and has a three-year annualized return of 26 percent. Both results rank in the top 1 percent of mid-cap growth funds. Using a disciplined quantitative approach to find stocks with accelerating earnings and price momentum, the fund trades often but avoided much of the volatility of its peers.

Its top stock holdings are eclectic. They include telecom NII Holdings Inc.; industrial materials firms Precision Castparts Corp. and BE Aerospace; and Medco Health Solutions Inc. This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has a reasonable 1 percent annual expense ratio.

"I think 2008 is going to be a very volatile year for mutual fund investing because of the subprime crisis and rising inflation," said Mark Salzinger, editor and publisher of The No-Load Fund Investor and The Investor's ETF Report newsletters in Brentwood, Tenn. "Growth funds will likely perform better than value funds, while large-cap funds will do better than small- and mid-cap funds."

Large-cap growth funds hold the stock of big companies with the most exposure to overseas demand and profit potential, which is a definite plus, Salzinger said. The only downside is that many of these firms are in technology, which would suffer in a worldwide economic slowdown.