'Strategic' in fund's name tells little about its aim PERSONAL FINANCE

September 06, 1992|By WERNER RENBERG | WERNER RENBERG,1992 By Werner Renberg

What's in a word? Or to be more precise, what's in a word when it is in the name of a mutual fund?

The Securities and Exchange Commission, which regulates them, doesn't tell sponsors what they may call their funds but does caution them against using names that may mislead. It insists that the investment policy suggested by a name has to be consistent with the policy stated in the prospectus -- and with its implementation.

A fund whose name includes the word "income" has to be invested in securities that generate interest and/or dividend income. A "tax-exempt" fund has to be invested so that at least 80 percent of its income is exempt from federal income tax. A "balanced" fund has to be at least 25 percent invested in fixed income securities. And so on.

What words are unacceptable? Those, for example, that imply safety or government-guaranteed returns, even if well-managed funds may be relatively safe and do invest in government-backed bonds.

Ambiguity, however, is another matter. It's tolerated.

Take the increased use of "strategic" in fund names.

"It gives the feeling of importance," Gene A. Gohlke, associate director of the SEC's Division of Investment Management, observes. "But it's just another word."

So what should "strategic" mean when you see it in a fund name? Since fund groups have given it different meanings in naming their funds, you've got to study the fund literature to understand each use.

An early application was the name of a natural resources fund concentrated in South African gold stocks, Strategic Investments, which founder Leroy Brenna registered July 29, 1974.

It was a time when interest in gold and gold stocks was raised in part by the imminent passage of legislation, which was to be signed by President Ford on his sixth day in office, to permit Americans to buy and sell gold again, starting in 1975.

Brenna wanted to call his fund Strategic Metals, he says, but the SEC would agree only if he concentrated in strategic metals stocks.

Within the last year, after he had legal problems with the SEC, directors of Strategic Investments terminated his firm's investment advisory contract and signed a new one with Lexington Management, which runs a family of no-load funds. Brenna's fund was renamed Lexington Strategic Investments.

Lexington managing director Lawrence Kantor says it and the old Strategic Silver fund may become the core of a "Lexington Strategic" group that is sold by brokers -- in contrast with the directly marketed no-load funds -- thereby giving "Strategic" a marketing connotation.

In 1986, when the Tax Reform Act made short-term capital gains more acceptable by abolishing lower rates for long-term gains, Dreyfus launched a bond fund and an equity fund with the aims of actively seeking short-term gains in addition to their primary goals of income and growth. In each case, the portfolio manager was empowered to borrow from banks to supplement shareholders' money -- that is, to use leverage -- when spotting attractive investments.

As the funds also were permitted to use other risky techniques -- short sales, options and futures -- which could be invoked to try to protect them on the downside, the company wanted names to suggest they had defensive capabilities, Kirk Stumpp, director of retail marketing, recalls. President Reagan's Strategic Defense Initiative, then being widely discussed, suggested just the word, he says. Hence, the names: Dreyfus Strategic Income and Dreyfus Strategic Investing.

In February 1987 Shearson Lehman Brothers introduced its Strategic Investors Portfolio, an asset allocation fund intended to achieve high total return by investing in variable mixes of stocks, bonds, money market and gold securities.

Merrill Lynch adopted "strategic" a few months later when it came out with Merrill Lynch Strategic Dividend Fund. Its strategy: to achieve long-term return by primarily invest

ing in dividend-paying common stocks that yield more than the Standard & Poor's 500 Index.

Still another meaning was offered in 1989, when Oppenheimer Management started the first of its four "strategic" funds, Oppenheimer Strategic Income Fund.

Oppenheimer Strategic Income seeks high current income from high-yield corporate, foreign and U.S. government bonds. By diversifying among the three markets, the firm hopes to achieve higher returns with less volatility than can be expected in any one of them.

Taking similar approaches, Shearson organized its Diversified Strategic Income Portfolio, and Colonial and John Hancock converted existing funds into Strategic Income Funds. "Each market has had tough years -- and great ones, too," says Colonial's Carl Ericson.

Oppenheimer Strategic Investment Grade Bond and Strategic Short-Term Income also seek high income but limit their corporate bonds to those of investment grade. Strategic Income & Growth invests in stocks for growth in addition to the same types of bonds for income.

Ask Art Steinmetz, a co-manager, what strategy could be common in four funds with such different characteristics, and he seems only to be half-kidding when he says: "Maybe they should be called Eclectic."

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