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6 great buys in mutual funds.

You're an astute investor in mutual funds, and year after year you pat yourself on the back for good judgment. But are you up on the numbers-crunching game that affects your quarter-to-quarter returns? Remember, no mutual fund, be it a dog or a dazzler, gives shareholders a free ride. So if you haven't taken the time to examine those pesky things called "expense ratios" - you should. Here's why: For a fund averaging an 8% annual return, "roughly 20% of your potential profit pays for fees and expenses," says Don Phillips, publisher of the Chicago-based Morningstar Mutual Funds. And ff returns dip further into the single digits - as some funds pros are predicting over the next three to five years - even more of your money stands to got tweaked by fees. Says Phillips: "We're looking at a situation where expenses could triple in impact compared with the last decade."

In the first six months of 1993 alone, investors poured a record $116 billion into mutual funds, making the industry one of the richest and most profitable in the country. Much of that wealth, though, gets skimmed right off the top of investor earnings. To got an idea of how fund investors get pinched even in good times, consider how in 1991, one of the landmark years in fund performance, profit margins at some of the biggies - including Fidelity and Seligman - ballooned from 27% to 38%. This is sobering stuff, given that you pay regardless of whether your fund is a winner or loser.

So, in seeking out the best mutual fund for your objectives, you'll need to focus not only on performance and risk - but cost, too. Just how much should you pay? These days, the average annual "expense ratio" - which includes charges for management administration, and other "agony" fees, as Morningstar editor John Rekenthaler calls them - hovers at about 1.50% for equity funds. Steer clear of anything higher, says Rekenthaler, since "it's hard to justify big fees with so many super funds in every category." What about funds that say their uber-management team is worth more? That's bunk. Study after study has revealed that funds with high fees - including loads and expense ratios - perform no better than those with lower costs.

As for bond funds, however, "there's a definite correlation between expenses and performance," explains Ron Roge, a certified financial planner in Centereach, New York. That's because a bond is almost like a commodity - there's not too much a manager can do to add value to it except offering reduced expenses. So there, "you want to look for the low-cost provider," says Roge. Expect to pay expenses in the range of .85% for these funds. Be careful, though, if rates seem too low. New bond funds, points out Rekenthaler, may lure customers with low rates, then raise them after they've attracted more assets. (For details on a fund's expense ratio, consult its prospectus, which spells out all fees up front.)

With the help of Summit, N.J.-based Lipper Analytical Services Inc. and Morningstar, BE has compiled a short list of funds that not only boast handsome returns - but are easy on your wallet too. First we took a look at the 20 top-performing equity and fixed-income funds for the five-year period ending June 30,1993. From that cut we identified the funds that met two other criteria: each fund has a below-average expense ratio for its category and charges no initial sales fee (or load). Spanning a range of investing styles, the list of our six funds should include something for everyone.


In the equity fund category, three funds stand out The first, Invesco Strategic Financial Services boasts an expense ratio of 1.07%. Even in 1991, when Invesco was up by 74%, expenses were a modest 1.13% - well below others in its category.

Invesco has more than three-quarters of its assets stashed in financial institutions such as banks and insurance companies. And like other such funds, Invesco is profiting nicely from upticks in the banking and thrift industry, as well as property/casualty insurers, who, due to a spate of disasters, are bound to raise premiums (and profits). According to Morningstar, this fund has zoomed ahead even as other financial funds lagged.

Our second pick, Twentieth Century Ultra Investors, shoots for capital growth - and over the past five years it has rewarded brave shareholders fabulously. Hand-wringers need not look at this fund, since its five-year 200% returns have come only after less-than-consistent annual results. Hungry for growth, the fund has favored volatilee sectors such as health care and technology. Still, unlike many high-risk funds, it has not lost a cent for its investors since 1987. This fund is best as a long-term hold, and pros say that the wait is well worth it.

Long considered an all-around star, Janus Twenty, our third selection, is still one of the best funds going. Unfortunately for rookies, this growth fund is closed to new investors. The upside, though, is a little-known fact: If you have a spouse, parent or grandparent who's currently invested, you can still sneak into this exceptional fund, which otherwise shut its doors last January.

With a total expense ratio of 1.01%, Janus'expenses are well below the average fund in its category. And thanks to manager Thomas Marsico, it has swerved around downswings in biotechnology, swapping those holdings for shares in the fast-growing communications field. Cunning management of Janus Twenty helped it survive the blips and dips of the '80s for an impressive five-year return of 191%. Shrewd investors who got into this average-risk fund back in 1988 have watched their holdings nearly triple.


Have a long investment horizon, and nerves of steel? If so, then the taxable Benham Target Maturities 2015 is a great candidate for handsome gains at low cost. Manager David Schroeder is partial to zero-coupon Treasury bonds, bills and notes maturing in the year 2015. But hang on. This portfolio mix makes for a roller-coaster ride, as these issues soar when interest rates drop but falter when rates rise. Still, this fund has returned 121% for its investors over the past five years, with a .62% expense ratio. And shareholders who intend to stay put until 2015 (the fund's closing date) are apt to cash out with a nice chunk of change.

Fidelity Capital & Income is hungry for both capital appreciation and income, as its name suggests. To achieve it the fund has an appetite for junk: Its two managers snap up bonds from companies in the doldrums - in bankruptcy or default. The companies they choose are a bit of a gamble, literally: A large portion of its holdings is in casinos such as Bally's and Resorts International. Because of its investing style, quarter-to-quarter performance tends to be dicey, though the outlook for this fund remains promising overall. In fact, last year, the fund topped all others in the high-yield category, gaining an impressive 28%. To boot, it's considered low-risk for its objectives, and has a below-average expense ratio of .80%.

Racking up distinction in the world of muni-bond funds is Dreyfus General Municipal Bond. A real pole-vaulter, this fund consistently lands in the top quartile of its category. Rather than bulk up on top-rated AA issues, manager A. Paul Disdier also tucks assets into medium-quality, high-yielding housing, airport and other quasi-risky bonds. With investments spread nationwide (as opposed to single-state munis), this fund - boasting razor-thin expenses - is shielded from the pitfalls of any one region. Though shareholders won't owe Uncle Sam a dime, any earnings are still subject to state and local taxes. So who said fund investing was perfect?

COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:1993 Money Management Guide
Author:Branch, Shelly
Publication:Black Enterprise
Date:Oct 1, 1993
Previous Article:After the big shot.
Next Article:Fun places to stash your cash.

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