Call it investing in your own backyard.
Little known to most investors, a small group of mutual funds build their portfolios around companies closely linked to a region of the country, a particular state or even a single metropolitan area.
Californians can rally around the California Fund, part of the Franklin Templeton Group of Funds.
Surprisingly, it is the only stock mutual fund that focuses on the Golden State, according to Morningstar, an investment research organization. In contrast, 183 mutual funds exclusively offer California tax-exempt bonds.
By Morningstar’s count, only 21 funds pursue an investment strategy tied to geographical areas around the country. Under Securities and Exchange guidelines, at least two-thirds of their portfolio must be companies with headquarters in the region or that do a significant amount of business there.
Other so-called regional funds focus on Pennsylvania, Ohio, Minnesota, the two Carolinas, the MidAtlantic region, eight states in the upper Midwest, 15 Southern states, the Northwest (including Alaska), the Rocky Mountain region and even the Cincinnati metropolitan area.
Most people who invest in these regional funds live there.
“The whole idea is to invest in things that you are familiar with, that you can identify with,” said Prabha Carpenter, who manages the Growth Fund of Washington, with its focus on companies based in the nation’s capital and the adjoining states of Maryland and Virginia.
Kevin Kresnicka, mutual fund analyst for Morningstar, likens it to a loyalty to your school.
“It’s a loyalty to your state, your region,” Kresnicka said. “Or it’s a belief in the economic vibrancy of the area where you live.”
Fund managers make the case that they have an edge in keeping tabs on corporate performances because of the proximity of companies, easy access to senior executives and media coverage.
Still, fund managers and analysts make it clear that investing in regional funds is not entirely a bet on an area’s economy.
It still comes down to the performance of the companies in the portfolio, and many count on profits from sales across the country and world.
“I would dissuade people to think they are buying the California economy when they buy the fund,” said Nick Moore, one of the managers of the California Fund.
In buying the California Fund, investors end up with plenty of companies with national or global presence, such as Mattel Inc., Hewlett-Packard Co., U.S. Robotics Corp., Chevron Corp., Clorox Co., Amgen Inc., Intel Corp., Netscape Communications Corp. and AirTouch Communications Inc.
“Why would we want to leverage to a very small economy when we can participate in the growth of the world economy which over time has been much more steady?” Moore said. “Our pitch is, (California) is a good place to headquarter a company, but it doesn’t mean we want all of their customers to be here.”
But the California Fund, like others with geographical focus, has holdings whose success depends on local economic conditions.
Regional or local banks fall into that category, as do publicly-traded real estate investment trusts, retailers, grocery stores, newspapers, utilities and health care systems.
The California Fund portfolio, for example, includes Silicon Valley Bancshares, Granite Construction, Irvine Apartment Communities, Von’s Companies Inc. (supermarket chain), McClatchy Newspapers Inc. (publisher of The Bee newspapers in Sacramento, Modesto and Fresno) and Southern California Water Co.
Moore estimates that only about 10 percent of the California Fund’s performance is directly linked to the state’s economy and thus the fund has benefited little from the state’s rebound.
“The weak California economy didn’t hurt Intel or Disney,” he said. “In fact, all the years that the California economy was down, the fund was up.”
But other regional funds, such as the Composite Northwest Fund, attribute as much as 25 percent of performance to local economic conditions.
That much tied to the fortunes of a region or state could be the difference between a year of good returns and a year of poor returns compared to more broadly based funds, said Morningstar’s Kresnicka.
“We definitely have more exposure to the Northwest economy than a typical mutual fund,” said David Simpson, portfolio manager for the Composite Northwest Fund.
Yet Simpson can also point to home-grown corporate powerhouses such as Boeing and Microsoft as “big drivers of our local economy but are not dependent on it.”
That would apply as well to other companies with markets far beyond the Northwest, such as Nike Inc., Micron Technology Inc., Starbucks Corp. and Weyerhauser Co.
On the other hand, the fund has plenty of companies very reliant on the region’s economic well-being: U.S. Bancorp, Albertson’s Inc., Oregon Steel Mills Inc., Boise Cascade Corp., Fred Meyer Inc. (retailer) and Alaska Air Group Inc.
Fund managers and analysts say such regional funds offer another way to diversify personal investments but shouldn’t be the only place to invest.
“We think the Northwest Fund is a great long-run growth vehicle, but don’t suggest to people that it should be the only mutual fund they have in their portfolio,” Simpson said.
It becomes another option along with funds that focus on a growing variety of investments with a range of risk, such as aggressive growth stocks, growth and income, high-yield junk bonds and more conservative government bonds, international stocks, precious metals and small-cap businesses.
xxxx INVESTING REGIONALLY Companies that are included in the Composite Northwest Fund: The Boeing Co. Microsoft Nike Inc. Micron Technology Inc. Starbucks Corp. Weyerhauser Co. U.S. Bancorp Albertson’s Inc. Oregon Steel Mills Inc. Boise Cascade Corp Fred Meyer Inc. Alaska Air Group Inc.
Companies that are included in the California Fund: Disney Corp. Mattel Inc. Hewlett-Packard Co. U.S. Robotics Corp. Chevron Corp. Clorox Co. Amgen Inc. Intel Corp. Netscape Communications AirTouch Communications Inc. McClatchy Newspapers Inc. Silicon Valley Bancshares
The following fields overflowed: CREDIT = Scripps-McClatchy Western Service
Local journalism is essential.
Give directly to The Spokesman-Review's Northwest Passages community forums series -- which helps to offset the costs of several reporter and editor positions at the newspaper -- by using the easy options below. Gifts processed in this system are not tax deductible, but are predominately used to help meet the local financial requirements needed to receive national matching-grant funds.
Subscribe to the Coronavirus newsletter
Get the day’s latest Coronavirus news delivered to your inbox by subscribing to our newsletter.