Special-sector funds offer long-term potential for gain

April 05, 1992|By Thomas Watterson | Thomas Watterson,Boston Globe

When several new "sector" funds were introduced in the early and mid-1980s, people wondered whether they would be good long-term investments.

Or, would the fact that these funds concentrated on one industry, such as health care, retailing or telecommunications, make them too volatile for anyone but the savviest, most aggressive investors?

Now that several sector funds have been around long enough -- at least five years -- to give them a meaningful track record, it seems like a good time to take another look.

With more than 30 sector funds, Fidelity Investments is the leader in this group, but other companies, such as T. Rowe Price, Vanguard, Putnam, Oppenheimer and Massachusetts Financial Services, have sector funds. This does not include many firms that have gold funds or utility funds, which have longer histories and are used for different reasons.

Although some sector funds have been as volatile as predicted, and some have never done well, others have turned in impressive numbers.

Fidelity's Select Food & Agriculture fund, for example, has beaten the Standard & Poor's 500 index every year since it was introduced in 1985. "As sector funds go, Select Food & Agriculture is one of the less volatile offerings," said Jack Walsh, editor of United Mutual Fund Selector, a Wellesley, Mass., newsletter. The fund's defensive nature "makes it well suited for 'conservative' sector investors."

Last year, Select Food's total return was up 33.5 percent, and the five-year annualized return is 22.4 percent, compared with 15.1 percent for the S&P 500.

For more aggressive -- and patient -- investors, Mr. Walsh suggests the Fidelity Real Estate fund. Although this one is not part of the Select group, it does give investors a way to participate in the eventual rebound in real estate, if they believe the worst is over.

It also helps that the Fidelity Real Estate fund is made up primarily of real estate investment trusts, notes Tom Desmond, an analyst with Morningstar Mutual Funds, a Chicago newsletter. Most REIT holdings are existing, income-producing properties, not speculative buildings such as offices and hotels, he said.

Another fund with "good comeback" potential is the Vanguard Specialized Energy fund, Mr. Walsh said. The fund has had negative returns for the past two years, but it should improve as the economy recovers.

Increased demand for oil and gas will mean higher sales, and should allow these companies to raise prices a little, which will help their stocks, he said.

For people who like high-tech, Mr. Walsh suggests the T. Rowe Price Science and Technology fund. The market for desktop personal computers may have slowed, but portable computers, graphic and networking systems are still growing, he believes. The fund was up 59.7 percent last year and has a three-year annualized return of 29.1 percent.

Of all sector funds, Fidelity's Select Health Care probably has gotten the most notice, because even though it concentrates on one industry, it has the best 10-year record for all equity funds. Last year, it gained 84 percent.

But there's still some debate over whether the oft-told story of an aging population has pushed up health-care stocks too much and whether they might be due for a decline, which would hurt health-care funds.

"I think the fund is a bit expensive," Mr. Desmond said of Fidelity Select Health Care. He suggests investors wait for a correction, then get in.

Over the long term, these funds will perform fairly well, he believes.

All in all, Mr. Desmond said, sector funds have "turned out to be an excellent place to put some of your mutual fund money."

Defining "some" for each investor depends on that investor's age, income, ability to absorb some losses and knowledge about particular industries.

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