Focused Funds Favored Over Stock Index Funds.

IF mutual fund investing were a spectator sport, you'd find me rooting for focused stock funds.

These funds, which concentrate their money in no more than a few dozen stocks, routinely take bigger risks than more diversified funds.

Some of them have excelled -- for instance, the Marsico Focus Fund, which rose more than 50 percent in each of its first two years of operation, 1998 and 1999, and has almost doubled the Standard & Poor's 500 Index's return through its short life so far.

Others have been awful -- for instance, the American Heritage Fund, which has lost 18 percent a year on average over the past five years. It has few challengers for the title of World's Worst Mutual Fund.

What makes focused funds so appealing as a group is the backlash they represent against an insidious force that glorifies mediocrity and bureaucracy in funds. In the trade, this nuisance is known as "closet indexing" -- a practice in which managers shield themselves from criticism by staying close to a benchmark index such as the S&P 500.

"I think to be successful in the next 10 years you're going to have to have concentrated portfolios," says Pat Adams, a former manager at several fund firms who set up his own shop last November in Milwaukee with the Choice Focus Fund. Since then, the fund, stocked with generous portions of computer software and semiconductor stocks among its 30 holdings, has gained 29 percent compared with a 2.6 percent return for the S&P 500.

In the ranks of more broadly diversified U.S. stock funds, which average 138 stocks according to Morningstar Inc., "everybody kind of looks the same," Adams argues. "I think people are going to wind up redeeming (selling) funds that look alike."

Focused funds have always boasted this kind of jaunty, in-your-face attitude. Their managers say they have the courage to stake their jobs on their best ideas, without hedging their bets.

"I honestly think there are not 200 to 300 great companies to own," said Claire Young, manager of the $8 billion Janus Olympus Fund in Denver, whose 71-stock portfolio borders on focused status.

As any veteran fund investor knows, however, wherever in-your-face jauntiness goes in the markets, there also goes volatility.

Consider the $3 billion Sequoia Fund, which after four bang-up years from 1995 through 1998 took a 16 percent drop in 1999, trailing the Standard & Poor's 500 Index by 38 percentage points. The blame fell squarely on a 20 percent decline in the class-A shares of Warren Buffett's Berkshire Hathaway Inc., by: far the biggest holding among Sequoia's 10 stocks (both the stock and the fund are up slightly this year).

"Concentrated funds should be considered an additive to, not a replacement for, a fully diversified portfolio," says State Street Research & Management Corp. of Boston, which recently expanded its focused-fund line-up with a Concentrated International Fund. In any focused fund, the manager's skills are doubly important.

With all their hazards, though, focused funds strike a blow against tyrannical trends that seem bent on turning funds into a generic commodity -- obsessive comparisons to market indexes, and the equally maniacal drive to classify every fund by type and size of the stocks it owns.

Everybody uses indexes like the S&P 500 as a benchmark to evaluate funds' performance. I did it myself a few paragraphs ago. But index comparisons spoil the party when managers begin trying to stay safely close to their benchmark. While doing. that may protect the manager's job for a time, it also makes the fund pointless to own in lieu of an unmanaged fund that merely seeks to track the index in question.

A second problem, classifying funds by style, also arises from an endeavor that seemed worthy enough in its original form. Morningstar, seeking to help investors compare one fund with another, created its style-box system putting funds into categories such as small-capitalization growth and large-cap value.

Soon, though, managers found themselves boxed in by pension consultants and financial planners demanding style "purity." Carried too far, this standard can stop managers from buying good stocks that don't fit their boxes -- or force them to sell stocks that commit the offense of growing too big.

Most focused funds eschew style purity and allow themselves more range of choice.

Fund investing isn't a sport, of course. You always want to be careful about letting your heart tell your head where to put your money. But focused funds are something to cheer about.

Chet Currier is a columnist for Bloomberg News.

What's With Janus Funds' Lost Allure?

Everybody in Mutual Fund Land wants to know whether the Janus Funds, the world's hottest fund group in the late 1990s, has suddenly lost its magic.

Is it just a symptom of the, general market malaise that 21 of the 22 Janus stock funds in business since the start of 2000 are sitting with minuses next to their names in the year-to-date Bloomberg tables? Or has runaway growth overwhelmed the firm s stoned stock picking skills, as some noisy critics allege?

There's no way to answer those questions reliably yet. But the debate has already proved educational.

Janus's comedown makes a strong case for keeping your fund investments unfailingly diversified among at least three or four management firms, regardless of bow superior one of them looks at any given moment.

Some of my money isin two Janus funds, Mercury an to keep it there. But I never want to entrust all my assets to Janus, any more than I do to Fidelity or Vanguard or anybody else Love a good fund firm, yes -- marry it, no.

Secondly, the situation reminds us that sooner or later long term investros always have their patinece tested -- and the test is often harder than people imagiened.

After rolling up spectacular returns in the mid- to late- 1990s, stock funds in the $300 billion group managed by Janus Capital Corp. in Denver have posted an average decline of 8.9 percent so far in 2000 corn pared with an average loss for all stock funds of 3.2 percent.

Fund investing is by definition a long dis run. Anybody who gives tance opon along time standout like Janus after a short term spell of disappointing resutls ts might hve roub24le winning that race.

Give Janus more time -- they've earned the right to some patience.