Amid signs that the economy has finally begun to perk up, the stock market has been bobbing up and down, finishing the first quarter about where it began. Stock mutual funds have merely broken even, with the average fund squeaking by with a gain of 0.2 percent for the quarter, as of Thursday, according to Lipper Analytical Services Inc. in Summit, N.J.
Big winners were the financial-services funds (up 6.9 percent), the small-company funds (4.1 percent) and science-and-technology funds (up 3.2 percent).
Hardest hit were the gold funds (down 8.3 percent). The second-worst group was health-and-biotechnology, the darling of the industry in recent years, which dropped 7.9 percent in the first quarter.
Some of the 11 funds in the health-and-biotechnology group have been warning investors for nearly a year that things were bound to slide. After gaining 44.4 percent a year on average for 1989 through 1991, a correction was not unexpected.
Still, in the context of unrelenting growth, the latest quarter "was something like an execution for the biotech stocks," said Kenneth J. Oberman, who manages the Oppenheimer Global Bio-Tech Fund, 1991's best-performing fund.
What happened to the health-and-biotech group? The managers say investors have moved heavily into cyclical companies, which are expected to post much better earnings as the economy snaps back.
They also say the early 1992 performance was not surprising after December's strong spurt, when the average health fund rose 15.6 percent.
Then, too, speculators' enthusiasm, which resulted in a flood of biotechnology offerings in late 1991, has waned as it has become apparent that many of the companies will not show profits for several years.
In light of the health care group's previous strength and the national debate over cost containment in health care, "we're probably in for a period of digestion" of earlier gains, said Edward P. Owens, who manages the $565 million Vanguard Specialized Health Care Portfolio (down 6.3 percent).
Currently, his favorite holding is Beckman Instruments, a producer of clinical chemistry equipment, whose stock he says is cheap relative to both earnings and cash flow.
He also likes Pfizer Inc., which he has been buying on dips below $70 a share in the wake of front-page news this month about problems with its Shiley heart valve, which he said provides a very small part of the company's business.
Mr. Oberman, manager of the $189 million Oppenheimer Global Bio-Tech Fund (down 11.4 percent), insists that the group remains a great growth area.
But in the short run, he said, "my suspicion is that if there is a substantial drop in the market, this group will be hit harder than the rest."
This will present a buying opportunity, he said. He particularly likes two companies whose technology is designed to control disease by manipulating genes and chromosomes: Isis Pharmaceuticals and Gilead Sciences.
He also recommends three agricultural biotech companies: Mycogen, Ecogen and Calgene.
John J. Kaweske, who manages the $940 million Financial Strategic Portfolios: Health Sciences (down 9.5 percent), does not expect a further drop. At worst, the sector should keep up with the overall market, he said.
His favorite holding is Qual-Med, a health maintenance organization that operates mainly on the West Coast. The company, he says, has the lowest cost and the fewest patient complaints of all HMO's in its operating area and sells very cheaply today.
Another favorite: T2 Medical, which is diversifying from home infusion therapy into managing chemotherapy centers, a business that he expects to grow 35 percent to 40 percent a year in the next three to five years.
Investors fled the Fidelity Select Health Care Fund (down 11.4 percent), whose assets dropped from $1.2 billion to $950 million this quarter. Nonetheless, Andrew S. Offit, who started managing the fund in May 1990, said that looking at the "big picture, these stocks are a good investment."
For pharmaceutical stocks, the price-earnings ratio -- now about 15 or 16 -- is near a 20-year low, he said. At present, 11 percent of the fund is invested in Pfizer, and Upjohn is another favorite.
Mr. Offit was transferred by Fidelity last Tuesday to manage the group's $222 million Convertible Securities Fund.
Fidelity said that during Mr. Offit's management of Select Health Care, "the fund's performance has been outstanding." He is being replaced by Charles Mangum, who has run Fidelity Select Medical Delivery for about a year.