Theme Funds Attract Cash, But Returns Can Be Mixed.

BOB Hope has "Thanks for the Memories." Andy Williams sings "Moon River." Lately some stock mutual funds have sought to win fans among investors with themes of their own.

They don't use a Henry Mancini-style orchestra or Johnny Mercer lyrics. But a cynic might say their intent is very much the same - to set a mellow mood that downplays clear thinking (so tell me, what's a "huckleberry friend" anyway?).

These funds practice what they call thematic investing - choosing investments based on broad social and economic trends such as longer human life spans (health care) or rising prosperity (financial services).

They've done a bang-up job of attracting money. Consider the $2 billion PaineWebber Strategy Fund, less than a year old, which buys stocks chosen by the brokerage firm's research department from a series of investment themes.

Or the AIM Dent Demographic Trends Fund, which opened in June 1999 and now boasts assets of $1.3 billion. Its managers invest taking into account population trends tracked by consultant Harry S. Dent Jr., whom the magazine On Wall Street recently described as a "celebrity mini-conglomerate" in the Martha Stewart mold.

Thematic funds' investment record, though; isn't so uniformly impressive. Since PaineWebber Strategy began last December, its Class A shares have lost 9.2 percent, trailing the Standard & Poor's 500 Index's 4.1 percent gain by 13 percentage points.

AIM Dent Demographic Trends got off to a hot start in 1999; its Class A shares boast a 43.6 percent return for the past 12 months. Since March 24 this year, though, they have fallen 102 percent, more than twice the S&P 500's 4.3 percent loss, in a much tougher market for computer, telecommunications and other growth stocks.

Let's be fair - a year or less isn't enough time to get a solid fix on the prowess of any fund management. But there's no need to wait to ask some tough questions about the whole idea of thematic investing.

It's based on what money managers call a "top down" approach, starting with an attempt to define broad economic or social trends and then picking stocks of companies that stand to benefit most. A "bottom up" strategy, by contrast, begins with analyzing individual companies.

Current themes at PaineWebber include "the American age of affluence" and "information revolution wars," which have prompted the Strategy Fund to invest in such stocks as America Online Inc., apparel retailer Gap Inc., cruise line operator Carnival Corp. and Lucent Technologies Inc.

AIM Dent Demographic Trends, inspired by Dent's forecast of a continued bull market in "the roaring 2000s," has been a big investor in stocks such as Veritas Software Corp., JDS Uniphase Corp. and Oracle Corp.

Bottom-up investing, as practiced by legends such as Warren Buffett and Michael Price, commands far more respect these days than the top-down approach.

Investing on the basis of broad themes may sound easier than digging through the numbers - company at a time. In practice, though, it's very difficult to practice successfully.

Social trends occur out in the open, where everyone can see them, and markets have a way of absorbing such information fast - often before any trend is visible to the naked eye. No matter how smart you are, your chances are poor of discerning these things before the market has already taken them into account.

"There may be a handful of managers who can do this, but it's tough," says Paul Greenwood, senior research analyst at the investment consulting firm Frank Russell Co. in Tacoma, Wash. Getting a trend almost right may do you no good at all. "There is always risk that external factors can devastate even the most reasonable forecasts," says Mary Farrell, senior investment strategist at PaineWebber Inc., in a chapter on thematic investing in her new book "Beyond the Basics."

Suppose, she said, that you owned pharmaceutical stocks in 1993, basing your investment on the broad theme of rising demand for medicines as baby boomers age. The stocks got clocked anyway as the Clinton administration considered health care reform ideas that threatened drug companies' profitability.

Thematic systems might hold more water if investing were a more intuitive business. In practice, though, it's often counterintuitive, rewarding those who can ignore what looks good on the surface and find value instead in ugly, overlooked or misunderstood situations.

The best choices of stocks, and funds, to buy are most often made with the mood music turned off.

Chet Currier is a columnist for Bloomberg News.

Too Many Customers Fail to Factor in Fees

Listen up, mutual fund investors, the authorities are running out of patience with you.

You're not paying enough attention to the fees that funds collect from your invested money each year, despite repeated efforts to raise your consciousness on this subject.

The General Accounting Office, the investigative arm of Congress, doesn't blame you explicitly. It says the main fault lies with the people who market funds, and the problem may be remedied by requiring them to disclose more information to you.

Even so, the agency strongly implies that you not looking out for your own best interests as well as you might. Consider these words from the executive summary of the GAO's report this month urging that funds be required to disclose dollar amounts of expenses in investors' quarterly account statements:

"Marketing their performance and service as different from those offered by others allows fund advisers to avoid competing primarily on the basis of price."

Why do investors willingly buy stock funds charging annual expenses of about 1.5 percent of assets, on average, when they could choose perfectly good funds from low-cost firms like the Vanguard Group and TIAA-CREF Corp. with expense ratios of 0.5 percent or less?

Nobody knows the full answer. Any attempt to understand the situation, though, must start with the fact that the results fund investors see and get are always after fees. Price competition is there all right - it's factored into performance, about which investors have shown they care passionately.