Choosing the right growth funds for 2010 is not an easy task. Normally, this might not pose such a problem because growth funds tend to perform over the long-term, unlike some other mutual funds which perform better at certain times in the year or economic cycle. But after a fairly remarkable 2009 to follow up the turbulent credit-crisis-inspired 2008 and 2007 years, 2010 has provided something of a wake-up call to most investors.

2010 has provided something of a wake-up call.

In fact, most growth funds opened the year with an average return of -2.55% (that’s right, a negative!). And most of the best-ranked funds have returned even less.

What this tells a lot of investors is that growth funds not only have to be held for roughly 5 years in order to realize the type of returns one has come to expect of such funds. But that’s not all. In fact, the stuttering start to the year has led even the highest paid and most respected portfolio managers to wonder whether there is more bad news to come. In an interview with Morningstar, Rudoph-Riad Younes of Artio International Equity claims that by bailing out the banks and not letting them fail, government have simply delayed the inevitable. In that same piece, Oliver Kratz of DWS Global Thematic commented that his fund has taken a less aggressive position globally, investing as little as 10% in one of the hottest economies of the world, China.

One of the only growth funds we could find that outperformed the average, the Monetta Young Investors Fund (MYIFX) which has been managed by Robert S Bacarella since the fund’s inception in 2006, holds a five-star rating from Morningstar. In digging deeper into its portfolio, it seems that Mr. Bacarella has taken to domestic securities as well. Where has he invested? Consumer Goods and Consumer Services with Apple Inc. Wal-Mart, Proctor & Gamble and McDonald’s ranking among their Top 25 holdings (they actually only hold 25 securities). Many of these are the same securities that Younes and Kratz cite in the Morningstar article, hold in their respective funds or they belong to sectors where these two managers invest heavily.

What does this tell investors looking at growth funds this year?

It could be that funds investing in domestic, large-cap securities are part of a growing crowd of institutional investors who believe that there are plenty of risks that are expected to materialize outside of the domestic, North American markets. Does that put global growth funds in the penalty box? It certainly seems that is the message for 2010.

So where should investors put their money? What growth funds are expected to perform in 2010?

Unfortunately, that will be a topic for another day, but the underlying message here is this: even growth funds have a tough time deciding where to invest. So if you have the courage to pull the trigger on investing, remember a couple of things:

• Invest regularly if you can — ten monthly contributions of $1,000 each will average out your $10,000 investment.
• Stay the course — stay invested for a period of 3-5 years (preferably 5 years as the performance on nearly all of these growth funds really starts to shine after 5 years).
• Choose funds that you believe in. Right now, you might believe in a high concentration of domestic securities (the big mutual fund managers seem to as well) but don’t pick a fund that must, by virtue of its Investment Objective/Statement stay invested this way.

This is certainly one area that needs further exploration and we will get into what we believe will be characteristics of the top growth funds in 2010 within the next 30 days.