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Equity Funds Come In Like A Lion


Finance: FIRST QUARTER SCOREBOARD

EQUITY FUNDS COME IN LIKE A LION

Gold and emerging markets led the advance, while bond funds tanked

Barely three months into 1996, investors have already poured an estimated $60 billion into equity mutual funds--almost as much as they invested in all of 1992. So far, they're getting their money's worth. For the first quarter, through Mar. 25, the average equity fund delivered a total return of 5.45%. The funds still trailed the 5.93% return of the Standard & Poor's 500-stock index, but the funds are now closer to the benchmark than they were all last year, when the index delivered 37.5%.

"After a year like 1995, I wasn't expecting much more than a 10% gain from the equity market this year," says Sheldon Jacobs, editor of No-Load Fund Investor. "We still might get that, but we're off to a start that suggests more." What makes the stock market's advance all the more impressive, says John Rekenthaler, publisher of Morningstar Mutual Funds, is that it took place during a "very bad quarter for bonds." After climbing for over a year, the bond market plunged in February, with the yield on the benchmark 30-year Treasury bond jumping from 6.1% to as high as 6.7%. That meant widespread losses for bond funds. Total returns for taxable funds were -0.60%; for tax-free funds, -1.58%.

Fund investors are choosing stocks over bonds because that's where the most money has been made. And for now, the huge inflows suggest there's fuel to drive prices higher. Robert Adler, whose AMG Data Services tracks cash flowing into mutual funds, says that the rate of investment now is $5 billion a week, down from $6.75 billion in early February. Still, that's up from $1.5 billion this time last year.

AGLITTER. With a notable exception, all categories of equity funds posted gains this quarter. Precious metals, or gold, funds staged one of their periodic stellar turns, up 23.41%. The last time they had such a surge was 1993, and they've been mainly in the dustbin since. The quarter's top performer is the $1.3 million Nashville-based Monitrend Gold Fund, up 64.62%. Its secret? "Junior Canadian mining stocks," said portfolio manager Phillip Verrill.

What propelled gold funds in 1993 was a revival in bullion prices and political change in South Africa; now, it's discovery. "We've had more valid gold strikes in the last year than the last 10 or 15 years," says Daniel B. Leonard, who runs Invesco Strategic Gold, up 44.34%. "They're looking in places never explored before, as nations like Indonesia and Vietnam open their doors." One big hit: Bre-X Minerals Ltd., a Canadian company with a major find in Indonesia. The stock has nearly tripled this year, to $145 (Canadian), and Leonard's fund owns 210,000 shares.

YEN DOLDRUMS. Funds that look to strike it rich by investing in Third World stocks are also finding success. Diversified emerging-markets funds scored a 9.2% return for the quarter, and even the beaten-up Latin American funds are showing spark. "Emerging-markets funds are still a great comeback story," says Michael Stolper of Stolper & Co., a San Diego firm that helps investors select money managers and mutual funds. The few bond funds that buy emerging-markets debt also showed strong returns.

International equity funds posted good gains, too. European regionals were up 6.28%. Pacific funds earned 5.57% even as Japanese funds slumped, dragged down by a lackluster market for secondary stocks and a stronger dollar, which makes yen-based investments less valuable.

The quarter's only loser: technology funds, down 2.45%. That's the second down quarter in a row as the once high-flying sector continues to correct. Some of the worst performers are pure tech funds--or more diversified ones, such as Robertson Stephens Value + Growth, that bet heavily on the sector. Bringing up the rear were the more interest-rate-sensitive funds, such as asset-allocation and balanced funds, which keep some portion of their portfolios in bonds, and utilities funds, which invest in the most rate-sensitive area of the market.

An ill-fated foray into bonds put a damper on the behemoth Fidelity Magellan Fund, which posted a skimpy 2.31% for the quarter. But a few megafunds did stand out. The $13.5 billion Janus Fund, the 11th-largest fund, earned 8.12%. "When tech sold off, investors started buying the large-cap growth stocks we already owned," says James P. Craig, Janus' manager. And one big fund, the Vanguard Index Trust 500 Portfolio, delivered an impressive 6.06% return just by investing in the same stocks and in the same proportions that are in the S&P 500 (BW--Mar. 31).

Every once in a while, the winners sputter and the losers shine. Twentieth Century Giftrust Investors, for instance, the best-performing fund for the 10 years ending Dec. 31, is one of the worst for this quarter, down 5.71%. American Heritage Fund, which was down 35.3% in 1994 and another 30.6% in 1995, rebounded with an 18.64% return. "I hope I will disprove my critics who have written me off," says American Heritage's Heiko H. Thieme, who runs an eclectic portfolio that features private placements in small companies and frenetic trading of large-cap stocks. Since 1993, portfolio losses and shareholder redemptions have reduced the fund from $150 million to $22 million.

Another laggard is Govett Smaller Companies A, down 7.64%. During the 1993-95 period, the fund gained an average 50.1% a year. But that was under the leadership of Garret R. Van Wagoner, who left at yearend to start the Van Wagoner Funds, all three of which finished near the front of the pack for the quarter. Already, the fund family has $175 million in assets. Van Wagoner, who had as much as 70% in tech when he ran Govett, now has only about 30%, mainly software and data communications companies. He's got 40% in health care, and about 8% in energy services.

Energy services in a growth fund? You bet. Randall E. Haase, portfolio manager at Alliance Quasar A, up 17.18%, has also taken a major stake in this area. "You're seeing secular growth in a cyclical industry," says Haase, who has invested in companies that rent offshore drilling platforms, including Global Marine, Diamond Offshore Drilling, and Reading & Bates. They're benefiting from demand for oil rigs that has doubled daily rental rates over the past year. Haase's fund is also investing in growth trends in the cyclical retail and airline industries.

NEW FACES. Also among the quarter's stars are new names. Dreyfus Aggressive Growth Fund, with $21.2 million in assets, is the best-performing diversified fund, up 38.89%. The six-month-old fund is run by veteran portfolio manager Michael L. Schonberg, who is new to Dreyfus. Another fund to watch is $1.1 million Rockwood Growth, up 25.75%. It has been around for 10 years but only been available in Idaho, where it's headquartered. But fund manager Ross Farmer says he plans to register in 35 states this year.

Among the battered bond funds, there are fewer standouts. Certainly among tax-free municipal bonds, rising long-term interest rates depressed fund prices and the best performers were mainly short-term funds, which have the least interest-rate risk.

But among the taxable bond funds, the quarter produced notable results. Value Line Convertible, leading taxable bond funds, earned 8.37%. That shouldn't be a complete surprise: Convertible debt is the bridge between stocks and bonds. What makes this fund stand out, says lead manager F. Barry Nelson, is that it sticks to the "old-fashioned" converts in which the investor participates in the appreciation of the underlying stocks. Many of the newer "exotic" converts, he says, pay a slightly higher yield but cap the amount of appreciation the convertible investors can realize.

Another star among the bond funds, Rydex Juno, is sort of an antibond fund. It sells bond futures short so the value goes up when bond prices go down. It's similar to the Rydex Ursa fund, which uses stock-index futures and options so that it moves in the direction opposite to that of the stock market. Both Juno and Ursa are funds for market-timers. Among the equity funds, Rydex Ursa is one of the losers--just where it should be in a bull market.

Most investors are not betting on Ursa, the bear, but on Taurus, the bull. And so far, that bet looks pretty good.By Jeffrey M. Laderman in New YorkReturn to top


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