06/17/96 FUNDS THAT WILL TAKE YOU WHERE THE ACTION IS

FUNDS THAT WILL TAKE YOU WHERE THE ACTION IS
They let you pick your sector--and still get plenty of diversification
So, BUSINESS WEEK has identified all the hot areas--such as technology, natural resources, and emerging markets. But you don't want the burden or risk of selecting individual stocks. You can, however, steer your money toward these high-growth sectors by choosing the right mutual funds. Although most funds are diversified and invest across dozens of industries, some take a more targeted approach.
Sure, because they're portfolios of securities, even the best funds' return will always fall behind the return of the top individual stocks. But a fund gives you something that cherry-picking a few stocks can't: diversification and professional management.
If you already own mutual funds, you might want to check with the fund company to find out what's in them. Growth funds have about 22% of their portfolios in technology, according to Morningstar Inc., the mutual-fund data company. Maximum-growth funds have nearly doubled that. So you may conclude you don't need any more tech.
On the other hand, growth funds are usually light on energy and natural resources--and rarely invest in any gold stocks. So if you want to beef up these sectors in your portfolio, you may need some specialized funds.
TECHNOLOGY. You think the Internet is one of the best investment plays around? So does Abel Garcia, portfolio manager of the United Science & Technology Fund. ``It's where the world is going,'' says Garcia, who has nearly 15% of the fund's assets in Ascend Communications Inc. and Cascade Communications Corp. He's no newcomer to these stocks, since he has been investing in them since they became public. Garcia has a further 10% to 15% in Net-related stocks such as Shiva, MFS Communications, and Xylan. Still, Garcia is not betting all his shareholders' money on the Net. He has major holdings in software and computer services. So far, the fund is up 18.1% this year, compared with 13% for the average technology fund and 9.7% for the Standard & Poor's 500-stock index.
Although Garcia's fund is beating the T. Rowe Price Science & Technology Fund this year, the better long-term record belongs to Price. The Price fund, a favorite among money managers who invest their clients' money in funds, also defines technology stocks broadly, investing in both the users as well as producers of high technology. If you take ``broadly'' in a geographical sense, consider the Seligman Henderson Global Technology Fund. It has nearly 40% of its money abroad, compared with less than 10% for most technology funds. That, perhaps, is one reason the fund's returns look sluggish of late. But if foreign technology is cheap, as some analysts argue, this fund could have a prosperous future.
NATURAL RESOURCES. T. Rowe Price New Era Fund may sound like a techie portfolio for the digital age. But it's definitely down to earth. The fund invests in producers and owners of resources like oil, metals, and forest products--and has 17% of its assets in gold stocks to boot.
Although New Era has the longest track record, it also has by far the most money of its peers--$1.3 billion. Those who want a similar but more nimble portfolio should consider United Services Global Resources, with just $25 million in assets--and much better performance so far this year. Like New Era, it invests in Big Oil but also can buy stock in resource companies that are too small to make an impact on the larger fund.
Its name does not suggest a traditional resources fund, but newsletter writer Jay Schabacker recommends Fidelity Select Portfolios Industrial Materials. ``It won't ever outpace the go-go growth funds during a raging bull market,'' says Schabacker. ``But it's a reliable tortoise, plodding toward profits as worldwide growth continues.'' Now, the fund's heaviest weightings are in aluminum and nickel stocks.
EMERGING MARKETS. They burst on the fund scene in 1993, and many came close to doubling their investors' money. But they've been in a slump most of the time since then. Earlier this year, when few investors were paying much attention, emerging-markets funds started to revive. They're up 14.3% so far this year, and by many counts this rally has a long way to go.
The best-known and most experienced emerging-markets fund manager is J. Mark Mobius, who runs the Templeton Developing Markets Fund. What endears Mobius and his fund to many investment advisers is his strict discipline in buying stocks. Rather than spend every dollar that comes in, Mobius will let cash build up if he can't get stocks at good prices. Other top performers in category are Warburg Pincus Emerging Markets, up 16% this year, and Robertson Stephens Developing Countries Fund, up 24.4%.
Investment adviser Michael Stolper of Stolper & Co. suggests taking the indexed route to these markets. ``It's a long bull market,'' he says, ``and being in it is more important than which fund you use.'' Vanguard's emerging-markets index fund also has an advantage over the actively-managed funds: Expenses are about 1.5 percentage points lower.
INCOME. It's a dicey proposition at a time when interest rates are under upward pressure. But those who need to generate income can do it without taking the plunge into long-term bonds. High-yield or ``junk'' bonds, for instance, stand up reasonably well to a strengthening economy. That's because the sheets of their issuers usually improve. One strong play in high-yields is Northeast Investors Trust. Its 8.8% total return so far this year is trouncing the competition. And its 9.5% yield is impressive, too.
Junk bonds play a role in the Lindner Dividend Fund, too. But the fund blends in common and preferred stocks, convertibles, and private placements to come up with a mix that usually allows the fund to pay a yield two percentage points higher than Treasury bills while keeping share-price volatility in check. Right now, the yield is 6.3%. And unlike conventional bond funds, Lindner Dividend offers prospects for capital appreciation.
Funds that invest in real estate investment trusts also make attractive alternatives to bonds. REITs pay dividends that come from rents on their properties. If the economy strengthens, rents go up--and so do the payouts. That's why Walter Wisniewski, president of Paragon Capital Management Corp., considers REIT funds such as CGM Realty Fund, Cohen & Steers Realty Shares, and Fidelity Real Estate Investment Fund as inflation hedges.
These vehicles have another attribute that many miss, he adds. REIT returns have little correlation with the stock market at all. So adding REITs to an all-equity mix actually lowers the overall portfolio's volatility. That makes REITs worth considering at a time when the stock market is near an all-time high.

By Jeffrey M. Laderman in New York