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Picking the winners for 1992.

Wall Street pundits all agree that stock mutual funds were a good place to have money invested last year. But they add a very large caveat: Don't expect a repeat performance this year.

Drive by a strong rebound in small company issues, stock mutual funds outpaced the broad market averages in 1991 for the first time since 1982, gaining 31.4%. This compared with the 30.4% gain by Standard & Poor's 500 Stock Index and 25.2% for the Dow Jones Industrial Average.

Some sectoral funds clearly left the field in the dust in 1991. The big winners were in health care and biotechnology mutual funds, which drummed up 74.3%, financial services funds, 60.6% and small-growth funds, 51.7%. The Oppenheimer Global Bio-Tech Fund turned in the best performance in 1991--with a total return of 121.13% for the year.

Unfortunately for investors, all that glitters is not gold. And those funds that were hot last year could end up as flops this year. "It is crazy for people to talk about switching funds because they only got a 30% return," says John Rekenthaler, editor of Chicago-based Morningstar Mutual Funds. "Some funds had a 60% or 70% return in 1991, but that's truly rare. People ought not to forget how good a 20% or 30% return really is in terms of mutual funds."

Driving home Rekenthaler's point, the Oppenheimer Global Bio-Tech Fund was closed to new investors last year, partly because of Oppenheimer's concern that investors' expectations were getting out of hand.

Rekenthaler says that the only way to judge mutual funds is to measure a particular fund's long-term performance over five or 10 years. "The investor will do very well by staying diversified in mutual funds for the long haul." So, anyone looking to buy funds this year should invest in funds with staying power.

Pick Of The Litter

Despite the recession and the lack of consumer confidence nationwide, money continued to pour into mutual funds in 1991. Today, a total of $1.32 trillion is invested in mutual funds. Because of their convenience and track record, mutual funds remain the investment choice for many families. It is estimated that at least one in four American households owns a mutual fund.

For a relatively moderate financial outlay (some funds accept initial deposits of $500 or less), mutual funds pool money from thousands of investors. This allows the individual investor to buy into a separate group of stocks, bonds or money-market securities, or a mix of all three. Other funds specialize in certain geographic regions, sectors or industries (i.e., health, technology or energy). A professional money manager handles the assets and chooses the investments in the mutual fund. Some funds have a sales charge (load), which can be as high as 8.5% of the amount that's invested.

Mutual funds are an attractive device for entering the financial market at any time, says John Markese, research director for the Chicago-based American Association of Institutional Investors. Obviously, many investors agree. During 1991, total sales of mutual funds were $234.5 billion, whereas the previous year, total sales were $149.5 billion, according to the most current figures available from the Investment Company Institute in Washington, D.C., which has 3,200 member firms.

Most of the rise in mutual fund sales resulted from inflows into money-market funds, says Jacob S. Dreyer, vice president and chief economist at the Investment Company Institute. "They [money-market funds] kept attracting money," says Dreyer, "even though short-term yields were at their lowest level since the early 1970s." The assets of shortterm funds (money-market funds, both taxable and tax-exempt) rose to $560.8 billion by November 1991.

Apropos of stock mutual funds, sales totaled $12.9 billion in 1991, compared with $7.2 billion the previous year. Granted, there was a slight drop in equity funds toward the end of the month, probably caused by a drop in consumer confidence, say financial experts. but then the stock market took off again before year-end, causing investors to revisit equity funds, says the Investment Company Institute's Betty Hart. "People were probably figuring they would park the money in money-market funds until they saw which way the economy was heading," Hart says. Approximately $31 billion was invested in stock mutual funds during the first 11 months of 1991. But about twice that amount--$63.4 billion--was flooded into bond funds during the first 11 months of 1991. "The public showed by their pocketbooks that they were confident that their money was safe and growing in mutual funds," Hart adds.

The Road Ahead

More than likely, say financial experts, higher-risk mutual funds will not reward investors the way they did in 1991. Similar sectors are expected to continue to do well this year, but none are predicted to produce last year's lofty returns.

Many experts believe the small-growth stock resurgence will continue this year. Last year was a perfect environment for financial stocks, "but can it get more perfect?" asks Scott Offen, an analyst with Boston-based Fidelity Select Brokerage and Investment Management. "Maybe."

Nearly everyone has been on the biotech wagon these days, and for good reason. Fidelity Select Biotech ended the year with a resounding total return of 99.05% and Fidelity Select Health Care was up 83.69%. It's also possible for the health care sector to maintain strong growth for several years in a row, experts say. Investors see health care and biotechnology as being on the cutting edge of life in the 1990s. Ken Oberman, portfolio manager for the Oppenheimer Global Bio-Tech Fund, believes this year will be a good year for biotech stocks again, "because these companies will continue to come out with new products." But he warns, "there will be volatility."

While investors in biotech, small-cap and high-yield mutual funds look back in rapture over '91, others are not so elated. Those investors who put their money in funds holding precious metals and natural resources took a beating last year. The worst performing fund in 1991 was Fidelity Select Energy Service, down 23.48%, followed by Strategic Gold/Minerals, down 24.9%. No one is predicting a turnaround for precious metals this year, especially if interest rates stay and money-market yields stay low.

The old standbys were not forsaken. Fidelity's Magellan Fund, the nation's largest mutual fund with $19.5 billion in assets, soared 36.4%. Many experts are predicting another strong but selective showing in mutual funds.

Will the bubble burst for these sectors in 1992?

"My feeling is that sectors that did well in 1991 will continue to work well," says Kenneth Gregory, editor of L/G No-Load Fund Analyst, a San Francisco newsletter. "I think the small company funds will do better than the big company funds, and that growth will do better than value."

Besides equity funds, investors also poured their money into bond and income funds. Long-term funds, bond and income funds continued in their "role as investment vehicles of choice for investors searching for high yields at tolerable risk," says the Investment Company Institute's Dreyer. Bonds run counter to interest rates, therefore, their value increases as rates fall.

Falling interest rates buoyed the zero-coupon bonds (sold at discount and repaid at full maturity). Some financial advisers warn, however, stay in zero-coupon bonds for the long haul, since they could drop rather quickly if interest rates go back up. And they will eventually.

How We Picked The Best

To help you pick the top performances for 1992, here's an exclusive list of the stellar performers over the last decade. BE's top picks are based on rankings from Summit, N.J.-based Lipper Analytical Services, which tracks the performance of mutual funds. Since one year's performance is not enough to judge a fund's merit, each fund is ranked in accordance to its long-term performance.

Each selected fund was divided into 10 categories, reflecting its objective (i.e., growth income). Out of a pool of 3,115 mutual funds, the top three scores in each category are listed. This objective rank is based on the average total returns for the past 10 years.

Each fund also receives a measure of high, medium or low, reflecting how its total returns have held up relative to those of other funds over the last four down cycles. Thus, a rating of high means that fund outperformed similar funds when interest rates were down and that it is more likely to stay afloat in a market dive.

The overall performance index (OPI) was derived from data supplied by the Boston-based brokerage firm Kanon Bloch Carre. The OPI, a scaled number between 1 and 100, compares each fund's total returns to similar funds over the last one-, three-, five- and 10-year periods.

The P/E, or price-to-earnings ratio, gives investors an idea of how much they are paying for a company's earning power. It is the price of the stock divided by its earnings per share. Thus, the higher the P/E, the more investors are paying.

Even if you know which fund you want to buy, the analysis doesn't stop. You also ought to read the fund's prospectus to help you make a more informed decision.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:mutual funds; includes glossary of investing terms
Author:Toolen, Tom
Publication:Black Enterprise
Date:Apr 1, 1992
Previous Article:Wall street wizards.
Next Article:In search of money.

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