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Reversals Of Fortune For Mutual Funds


Finance

REVERSALS OF FORTUNE FOR MUTUAL FUNDS

All that glittered in 1994's third quarter was not gold. Mutual funds that focused on emerging Latin American markets crowded the list of top performers, joined by a number of domestic technology and health-care portfolios, as well as funds targeting China and Southeast Asia. But the most dazzling performance did come from a pure play on the yellow metal. After ending 1994's first half down 15.30%, the $137 million Lexington Strategic Investments Fund, which focuses on South African gold shares, snapped out of its lethargy to tear up the charts, ending the quarter with a 43.55% gain.

That turnaround is just one example of the abrupt reversals of fortune many funds experienced in 1994's third quarter. Many of the quarter's big winners, such as the Latin America funds, were investment pariahs earlier in the year, when their thinly traded, frothy native stock markets suffered sizable corrections. And many of the quarter's losers, such as funds concentrating on Japanese stocks and real estate, were the first half's darlings. Case in point: Capstone Nikko Japan. It wowed investors with a first-half total return of 27.69%, making it the second-best-performing fund. This quarter, it had the dubious distinction of being the fourth-worst performer, falling almost 7%. "The second to third quarter was a very dramatic time," says John Rekenthaler, Morningstar Mutual Funds' editor. "It's a perfect reminder of how easy it is to lose money by selling funds that have gone down and buying funds that have gone up."

Many equity funds, however, had happier tales to tell of how they did this summer. None of the 19 equity-fund groups tracked by mutual-fund data company Morningstar Inc. turned in a negative return, in stark contrast with the parade of negative signs preceding the same fund categories in the first half. Equity funds were up an average of 5.2%, a decent return and a big improvement from their -3.38% return as of June 30. That beat the Standard & Poor's 500-stock index average, up 4.19% as of Sept. 26.

If equities emerged from the summer somewhat refreshed, bond funds were still stressed out from the deleterious effect of rising interest rates. While improving since the first half, many bond funds had puny returns. Taxable fixed-income funds returned an average of 0.22%, while municipal-bond funds moved up just 0.24%. Treasury-bond funds had a return of -0.17%. High-yield bond funds fell the most, an average of 0.36%. That puzzles Morningstar's Rekenthaler, since high-yield funds often act like stock funds. "Either the high-yield market is very astute and is discounting an economic slowdown early, as it did in 1989, or there are some great high-yield bargains out there," he says.

PURE GOLD? The few bright spots in bondland were in areas that either had some stock market exposure, such as convertible bond funds, up 3.26%, or that tracked other hot areas, such as emerging markets. The top-performing taxable bond fund, for example, is the $272.5 million Fidelity New Markets Income Fund, which invests in emerging-markets debt and is up almost 17%. That return is even more remarkable in light of the fund's more than 20% loss as of early August.

Robert Citrone, the fund's manager, credits the overall rebound in the emerging markets fixed-income area for the comeback. Citrone had large exposures to two of the best-performing markets in Latin America, with over 20% in Brazil at one point and more than 10% in Ecuador. The fund also benefited from a high weighting in floating-rate debt. That meant that the rise in short-term interest rates actually boosted the fund's return, since many bonds reset at higher rates.

While many gold funds sparkled this quarter, Lexington Strategic Investments shone the brightest. The fund benefited from its focus on South African gold shares, which moved up more than North American gold stocks after political concerns in South Africa abated. But one gold fund ended up on the list of "worst" funds. The tiny $1.7 million Monitrend Gold is a bearish hedged fund that focuses on North American mining shares and didn't share in the outperformance of South African gold shares. The fund is down 5.73% for the quarter.

BULLISH OUTLOOK. What might the future hold for gold funds? Lexington Strategic Investments' portfolio manager Robert W. Radsch, who began managing the fund in July after 12 years of managing a gold fund for Bull & Bear Group, cites slowing production and steadily increasing jewelry demand as long-term positives. After trading in a fairly narrow range for most of the year, gold topped $400 an ounce on Sept. 27 for the first time in more than a year. Yet gold funds are notoriously volatile and are best used as part of a diversified portfolio.

Many funds that explored the wilds of the emerging markets find themselves on the top 50 list. The biggest winners were a few small, barely year-old funds investing in Latin America, such as the $30 million BT Investment Latin American Equity Fund, which took second place, and its sister fund, the $38 million Hercules Latin American Value Fund, which was in third place. Maria Elena Carrion, the funds' manager and head of the Latin American equities team at BT Investment, says the funds were up more than 30% because her group's "pounding-the-table bullish" outlook on the markets at the end of the second quarter proved on the mark. The funds moved into markets that had been clobbered in the first half, heavily overweighting in Argentina, Brazil, and Mexico, reducing the fund's cash position to the smallest ever. Since then, Carrion has been shifting a bit out of Brazil and into Mexico and Argentina. Should the Brazilian stock market lose 15% to 20% of its value, Carrion says she would look at it again.

A soaring Brazilian stock market also buoyed the performance of the fourth runner-up for best equity fund, the $342 million GT Latin America Growth A Fund, up almost 31%. Investment manager Soraya Betterton gives a 40% weighting in Brazil credit for much of the increase. Brazilian equities were helped by the success of former Finance Minister Fernando Henrique Cardoso's currency reform, which helped reduce the inflation rate from 45% to 50% per month back in July to under 1% currently. Also helping the So Paulo Stock Exchange is the strong standing of free-market advocate Cardoso in the polls, making it likely that he will win the presidential election in October. "In the medium-term, Brazil has the most potential in Latin America," says Betterton. "But it is also perhaps the most vulnerable to a near-term correction."

GROWTH FOCUS. Not all the kudos go to funds that invest overseas, however: Merger mania boosted health funds into the second-best-performing equity group, up 11.64%. Technology funds took third place, rising 11.5% after enjoying a big rally in August. That moved $220 million Seligman Communications & Information A Fund into 11th place for the quarter, up 26.89%. The fund has about 35% of its portfolio in semiconductor-related stocks. The fund's top holdings include EMC, a maker of memory devices for mainframe computers; Advanced Micro Devices Inc., an Intel Corp. rival in the race to come out with the new generation of microprocessors; and Parametric Technology Corp., a software maker.

Looking ahead, fund experts speak of a coming turn from value stocks to growth stocks. "After 21/2 years, growth stocks are quite reasonably valued relative to value stocks, and the cycle is ready to turn," says Rekenthaler. The question is when. Investment manager Kurt Brouwer of San Francisco-based Brouwer & Janachowski, says he is also starting to look more at growth stocks. He likes the Warburg Pincus Emerging Growth Fund as well as the Janus Fund, both of which "can really run fast when things turn around."

Money continued to flow into equity funds in the third quarter. Net new cash flow into stock funds was $14.1 billion in August, up from $9.2 billion in July, and $12.2 billion in August of 1993. So far this year, the flow of money into equity funds is up 12.4% compared with the same period in 1993--which was a record year. At T. Rowe Price Associates Inc., "we're running ahead of last year's record pace for equity funds," says spokesman Steven Norwitz. Cash flow into domestic equity funds has doubled, he says, and it's up 61% for international equities.

Bond funds are a different story, with the industry experiencing a continued net outflow of money. "It's like Chinese water torture," says Norwitz. "Every month, a little more money leaves bond funds." Some of that money is finding a new home in money-market funds. For example, Norwitz says that $500 million of the $525 million flowing into T. Rowe Price's money funds thus far in 1994 came from exchanges out of other T. Rowe Price funds. Such an inflow into money funds contrasts with the first eight months in 1993, when $454 million flowed out of T. Rowe Price's money funds.

If there's any wisdom to be gained from the third quarter's results, it's that chasing trends, such as riding on the coattails of the quarter's winners, can do serious violence to your portfolio. In a tumultuous quarter when so many abject losers turned into high-flyers and vice versa, the smartest move might be to ignore the crowd, study the numbers, and come up with your own recipe for success. THE BEST RETURNS

APPRECIATION PLUS REINVESTED DIVIDENDS AND CAPITAL GAINS BEFORE TAXES

JUNE 30-SEPT. 26, 1994

LEXINGTON STRATEGIC INVESTMENTS 43.55%

BT INVMNT. LATIN AMERICAN EQUITY 34.52

HERCULES LATIN AMERICA VALUE 32.17

GOVETT LATIN AMERICA 31.21

G.T. LATIN AMERICA GROWTH A 30.60

FIDELITY LATIN AMERICA 29.10

SEVEN SEAS EMERGING MARKETS 27.92

UST MASTER EMERGING AMERICAS 27.60

UNITED SERVICES GOLD 27.42

T. ROWE PRICE LATIN AMERICA 27.14

SELIGMAN COMM. & INFORMATION A 26.89

TCW/DW LATIN AMERICAN GROWTH 26.68

MERRILL LYNCH LATIN AMERICA B 26.31

SCUDDER LATIN AMERICA 25.88

FIDELITY EMERGING MARKETS 25.31

G.T. GLOBAL EMERGING MARKETS A 25.12

RBB-BEA EMERGING MARKETS EQUITY 23.59

VAN ECK INTL. INVESTORS GOLD 22.92

MORGAN GRENFELL EMERG. MKTS. EQ. 22.80

PFAMCO EMERGING MARKETS INSTL. 22.71

VANGUARD INTL. EQ. INDEX EMERG. MKTS. 22.61

FIDELITY SELECT PAPER & FOREST PRODUCTS 21.38

LEXINGTON GOLDFUND 21.34

FIDELITY SELECT DEVELOPING COMM. 20.61

GOVETT EMERGING MARKETS 20.45

FIDELITY SEL. SOFTWARE & COMPUTER 19.86%

MORGAN STANLEY INSTL EMERG. MKTS. 19.68

FIRST AMERICAN TECHNOLOGY A 19.60

FIDELITY SELECT PRECIOUS METALS & MIN. 19.46

MONTGOMERY INSTL EMERGING MARKETS 19.33

PBHG EMERGING GROWTH 19.09

USAA INVESTMENT GOLD 17.91

MONTGOMERY EMERGING MARKETS 17.91

KEYSTONE PRECIOUS METALS HOLDINGS 17.61

VANGUARD SPEC. GOLD & PREC. METALS 17.31

BENHAM GOLD EQUITIES INDEX 16.99

MERRILL LYNCH DEVEL. CAPTL MKTS. A 16.97

SMITH BARNEY SHEARSON PREC MET. & MIN. B 16.88

FIDELITY SELECT MEDICAL DELIVERY 16.85

LEXINGTON STRATEGIC SILVER 16.84

THOMSON PRECIOUS METALS & NAT. RES. B 16.75

TWENTIETH CENTURY GIFTRUST INVESTORS 16.72

FRANKLIN GOLD 16.47

BULL & BEAR GOLD INVESTORS 16.23

JPM INSTITUTIONAL EMERGING MKTS. EQ. 16.19

FIDELITY SOUTHEAST ASIA 16.16

T. ROWE PRICE SCIENCE & TECHNOLOGY 16.16

PIONEER GROWTH 16.15

PIERPONT EMERGING MARKETS EQ. 16.14

KEYSTONE AMERICA HARTWELL EMERG. GR. A 16.13

Inflation fears in the U.S. and a stabilizing political environment in South Africa fueled a resurgence in gold

Economic reforms in Latin America led funds investing in Mexico, Brazil, and Argentina to rack up hefty double-digit returns

MOSTLY MIDDLING RETURNS

FOR THE BIG FUNDS

Total* Assets**

Funds return Billions

FIDELITY MAGELLAN 4.39% $36.7

INVESTMENT COMPANY OF AMERICA 3.87 20.0

WASHINGTON MUTUAL INVESTORS 3.27 13.3

FIDELITY ASSET MANAGER 3.09 11.8

VANGUARD/WINDSOR 0.93 11.6

FIDELITY PURITAN 2.92 11.4

INCOME FUND OF AMERICA 0.82 10.8

TWENTIETH CENTURY ULTRA INVESTORS 5.04 10.0

JANUS 2.25 9.7

VANGUARD INDEX 500 4.42 9.2

*Appreciation plus reinvested dividends and capital gains, June 30 through Sept. 26, 1994

**As of 8/31/94 DATA: MORNINGSTAR INC.

THE WORST RETURNS

APPRECIATION PLUS REINVESTED DIVIDENDS AND CAPITAL GAINS BEFORE TAXES

JUNE 30-SEPT. 26, 1994

STEADMAN OCEAN TECHNOLOGY & GROWTH -10.53%

DFA JAPANESE SMALL COMPANY -8.52

G.T. JAPAN GROWTH A -7.20

CAPSTONE NIKKO JAPAN -6.82

T. ROWE PRICE JAPAN -6.70

MONITREND GOLD -5.73

FIDELITY JAPAN -5.64

JAPAN -5.19

FIDELITY SELECT AUTOMOTIVE -5.02

CAPSTONE NEW ZEALAND -4.88

WRIGHT EQUIFUND-JAPANESE NATL. FID. EQ. -4.87

FIDELITY SELECT BROKERAGE & INVESTMENT -4.81

FIDELITY SELECT NATURAL GAS -4.28

MORGAN STANLEY INSTL. JAPANESE EQUITY -4.03

ROBERTSON STEPHENS CONTRARIAN -3.88

RYDEX URSA -3.32

STEADMAN AMERICAN INDUSTRY -3.31

PIONEER WINTHROP REAL ESTATE INVMNT. -2.94

DREYFUS STRATEGIC GROWTH -2.90

EV MARATHON TOTAL RETURN -2.74

UNITED SERVICES REAL ESTATE -2.64

MERRILL LYNCH PACIFIC B -2.60

COLUMBIA REAL ESTATE EQUITY -2.57

PAINEWEBBER EUROPE GROWTH A -2.57

EV TRADITIONAL TOTAL RETURN -2.51

MORGAN GRENFELL INTL. SMALL CAP EQUITY -2.34%

COHEN & STEERS REALTY -2.16

AMERICAN CAPITAL REAL ESTATE SECS B -2.11

VANGUARD INTL. EQUITY INDEX PACIFIC -2.07

FIDELITY REAL ESTATE INVESTMENT -2.06

PRA REAL ESTATE SECURITIES -1.90

CGM REALTY -1.90

GROWTH FUND OF WASHINGTON -1.81

SMITH BARNEY SHEARSON UTILITIES B -1.81

STEADMAN INVESTMENT -1.80

SEI INTERNATIONAL PACIFIC BASIN A -1.64

CAPSTONE FUND OF THE SOUTHWEST -1.53

FIDELITY SELECT UTILITIES GROWTH -1.53

FIDELITY SELECT ENERGY -1.52

INVESCO STRATEGIC ENERGY -1.51

EAGLE GROWTH -1.42

JOHN HANCOCK FREEDOM NATL. AVIA. & TECH. A -1.30

CAPITAL GROWTH A -1.24

DFA/AEW REAL ESTATE SECURITIES -1.24

PAINEWEBBER GLOBAL ENERGY B -1.24

STATE STREET RESEARCH GLOBAL ENERGY A -1.18

CAPITAL GROWTH INVESTMENT -1.18

CALDWELL & ORKIN AGGRESSIVE GROWTH -1.14

PIERPONT INTERNATIONAL EQUITY -1.14

WPG DIVIDEND INCOME -1.08

The land of the rising sun became the land of declining returns: Japan funds, the first-half favorites, fell from their lofty highs

Utilities lost their glow as increasing competition led to the unthinkable: Some utilities cut their dividends in 1994

HOW THE FUND GROUPS FARED

APPRECIATION PLUS REINVESTED DIVIDENDS AND CAPITAL GAINS BEFORE TAXES

JUNE 30-SEPT. 26, 1994

Fund group Total return

SPECIALTY-PRECIOUS METALS 15.46%

SPECIALTY-HEALTH 11.64

SPECIALTY-TECHNOLOGY 11.50

MAXIMUM GROWTH 6.92

SMALL COMPANY 6.78

FOREIGN 6.75

PACIFIC 5.66

WORLD 5.08

GROWTH 4.71

SPECIALTY-NATURAL RESOURCES 4.45

GROWTH & INCOME 3.66

EUROPE 3.32%

EQUITY-INCOME 3.20

ASSET ALLOCATION 2.58

BALANCED 2.40

SPECIALTY-MISCELLANEOUS 1.70

SPECIALTY-UTILITIES 1.62

INCOME 1.01

SPECIALTY-FINANCIAL 0.57

U.S. DIVERSIFIED EQUITY 4.82

ALL EQUITY FUNDS 5.18

S&P 500 4.19

Taking risks --especially abroad--was the name of the game. International equities out-performed domestic stocks for yet another quarter

THE BEST-PERFORMING BOND FUNDS

TAXABLE FUNDS

Total return*

FIDELITY NEW MARKETS INCOME 16.72%

G.T. GLOBAL HIGH-INCOME B 9.97

ALLIANCE GLOBAL DOLLAR GOVERNMENT B 8.86

SCUDDER EMERGING MARKETS INCOME 8.43

BEAR STEARNS EMERGING MARKETS DEBT 8.13

GOVETT DEVELOPING MARKETS BOND 6.16

FIDELITY CONVERTIBLE SECURITIES 6.12

PRUDENTIAL INCOMEVERTIBLE B 6.03

DEAN WITTER CONVERTIBLE SECURITIES 5.50

ALLIANCE BOND CORP. BOND A 4.80

TAX-FREE FUNDS

Total return*

MAS PA MUNI FIXED-INCOME 1.84%

MAS MUNI FIXED-INCOME 1.37

CGM AMERICAN TAX-FREE 1.34

CALVERT TAX-FREE RESERV. LONG-TERM A 1.20

CALVERT TAX-FREE RESERV. VT MUNI A 1.17

DREYFUS BASIC MUNICIPAL INTERMEDIATE 1.17

FRANKLIN CA TAX-FREE INCOME 1.15

SMITH BARNEY MUNI BOND CA A 1.14

SUNAMERICA TAX-EXEMPT INSURED A 1.13

HANIFEN, IMHOFF CO. BONDSHARES 1.13

*Appreciation plus reinvested dividends and capital gains, June 30 through Sept. 26, 1994 DATA: MORNINGSTAR INC.

Suzanne Woolley in New York


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