It's getting to be a habit. Every three months, Lipper Analytical Services releases its lists of the top-performing mutual funds. And almost every quarter, the winner is a "sector fund," a category that didn't even exist 10 years ago.
It has happened again. For the 12 months that ended June 30, the best-performing fund was Select Health Care from Fidelity Investments in Boston. Like other sector funds, this one concentrates on one industry: health care and biotechnology. Other sectors include energy and financial services.
Fidelity introduced the concept in June 1981 with four sector funds, and it now has more than 36. Sector funds also are offered by Financial Funds Inc. (formerly Financial Programs) in Denver, the Vanguard Group in Valley Forge, Pa., and Putnam Financial Services in Boston.
Sector funds can give investors a very bumpy ride. "They're much more volatile than other funds," says Eric Kobren, publisher of Fidelity Insight, a Wellesley, Mass., newsletter that follows Fidelity.
In 1989, for example, the Fidelity Select Broadcast & Media fund posted a gain of 32.5 percent. Last year, it lost 26.2 percent. For the first half of this year, the fund is ahead 11.3 percent.
The assets of sector funds can also change very fast, causing problems for investors and managers. For example, in the first two months of 1984, the assets of the Fidelity Select Technology fund plunged from about $720 million to about $440 million because of a series of bad reports about technology stocks.
When those reports came out, many investors sold their shares in the fund, forcing the portfolio manager to sell large positions in several stocks. That helped drive down the prices of those stocks and the price of the fund, which fell about 25 percent. That kind of event is almost impossible in a fund that's diversified across several industries.
Also, Mr. Kobren notes, Fidelity's sector funds have a 3 percent sales charge, plus annual expenses. Even no-load sector funds generally have higher expenses than more-diversified funds.
Starting sector funds in 1984 "was not our greatest idea, in
retrospect," says Brian Mattes, a Vanguard spokesman, who explains that the fund seems to attract more short-term oriented investors than the company likes to have.
"I think all investors have a tendency to buy yesterday's news," agrees Ellen Hoffman, vice president of retail services at Fidelity. While the company "doesn't want to talk somebody out of something they want," Ms. Hoffman says, it tells investors that while sector funds are less risky than individual stocks, they are riskier than a diversified fund. So investors who like the outlook for, say, the computer industry might want to buy a sector fund if they don't know which computer stock to buy.
Specialists say sector funds should be a small part of a investor's mutual fund portfolio. If you have $50,000 in mutual funds, no more than $2,500 to $5,000 should be in a sector fund, they say.