Consumer Reports rates 60 mutual funds, predicts their performance (Feb. 2003).

YONKERS, NY -- The stock market could be volatile for at least a year, and it won't necessarily trend upward. At the same time interest rates seem to have nowhere to go but up, making bonds a risky bet. If you're investing for the long haul, however, you can invest with assurance if you follow Consumer Reports' suggestions as outlined in "Where to Invest Now," from CR's March 2003 issue.

Consumer Reports, using data from fund- and stock-rating company Morningstar, has identified 40 promising equity funds. To round out your portfolio, we've selected 20 bond funds with much of the same stringent criteria.

"In good times and bad, you can be sure of one thing: mutual-fund expenses, loads and fees leave less in your pocket," says Associate Editor Tobie Stanger. "So the bond and stock funds we've chosen are all low-cost options: true no-load funds with lower-than-average expense ratios. And while past performance is no indicator of the future, it's notable that all the funds have outperformed their peers for at least three years. Two-thirds of the stock funds have beaten comparable funds in both bull and bear markets."

Since manager experience counts, the CR roster includes only funds whose managers have been at the helm for at least three years.

For the first time, Consumer Reports' annual mutual fund review has added predictions provided by Financial Engines (www.financialengines.com), a Palo Alto, Calif. company that provides investment advisory services. "While this measure is no guarantee of future performance, it will help readers get a more complete picture of the potential risks and rewards of investing in each fund," adds Stanger.
Consumer Reports favorites in each category follow:

STOCK FUNDS

We've split equity funds by asset size and also into three different investment styles. They're ranked in each category according to three year performance.

• Large-cap funds concentrate on the 250 largest U.S. corporations, with assets equal to or exceeding about $7.8 billion. Top picks: Clipper, Mairs & Power Growth, and Jensen Portfolio.

• Mid-cap funds invest in the 750 corporations in the United States with assets between about $1.3 billion and $7.8 billion. Top picks: Yacktman, Meridian Value, and T. Rowe Price Mid-Cap Growth.

• Small-cap funds on our list are chosen from among the 4,000 U.S. companies with capitalization between about $50 million and $1.3 billion. Top picks: Delafield, CGM Focus, and Buffalo Small Cap. International funds on our list hold no U.S. equities and invest broadly across continents. Top picks: Preferred International Value.

• Socially conscious funds invest only in companies that refrain from harming the environment or workers' and consumers' health. Top picks: Ariel.

BOND FUNDS

Bond funds in our lists are ranked according to on each fund's 5-year average annual return.

• Corporate bond funds. Short-term funds have portfolios with an average maturity of up to 3 years. Top picks: Fidelity Intermediate Bond, and Fremont Bond.

• Government bond funds. Top picks: Vanguard Short-Term Federal, and Vanguard Intermediate-Term U.S. Treasury.

• Municipal-bond funds. Interest income from muni-bond funds is not subject to federal income tax. Top picks: Vanguard Limited-Term Tax-Exempt, and American Century Tax-Free Bond.

MUTUAL FUNDS' 5 BEST-KEPT SECRETS AND HOW TO AVOID HIDDEN DANGERS

Few funds give their investors much more than the law demands: a description of their legal structures, summaries of investment-strategies, data on past performance, and details on commissions and expenses. What you don't know can hurt you.

So Consumer Reports' March 2003 issue identifies five things that mutual funds should be telling you to help you make better fund choices. We also offer some guidance for avoiding the worst potential problems.

"Just after we went to press (on 1/23)," says Senior Editor Jeff Blyskal, "the Securities and Exchange Commission approved a new rule requiring mutual funds to disclose important information about their proxy voting policies and the votes they cast for the shares of stock owned by the funds.

"That's a good start," added Byskal, "but our report shows that mutual funds keep four other types of information secret from their owners-portfolio manager compensation, more frequent information about which stocks the fund holds, the results of SEC inspections, and the conflicts of interest the fund managers may have with their investment banking and brokerage affiliates."

Until that happens, here are three steps that investors can take to protect themselves:

• Consider restricting your holdings to stand-alone mutual-fund companies. Fund companies without investment banking connection will free you of the risk that your fund could become a repository for dubious new issues.

• Avoid fund overlap. Even though you can know what the fund holds only once every six months, check to be sure that you aren't over-invested in one security--or in one type of security.

• Avoid unnecessary expenses. Stick to no-load funds that don't charge 12b-1 marketing fees. Then shop for funds with low expense ratios, generally around 1 percent for domestic stock funds.