With common stocks on a roll for almost all of the last five years, it wasn't unusual for equity fund managers to produce average annual total returns exceeding Standard & Poor's 500 Stock Price Index's 15.9 percent. Three of 10 did just that.
But 20 percent? Or even higher returns?
Not many funds could beat the popular benchmark of stock market performance by 5 percent or more. Those that did tended to be more aggressive funds, characterized by above-average volatility, such as capital appreciation funds.
Nobody knows whether top capital appreciation funds will continue their above-average performance. But if you're ready to assume high risk in hopes of earning high returns, consider them.
As defined by Lipper Analytical Services, funds in this category aim at maximum capital appreciation. Their managers prefer to invest 90 percent or more of their assets in stocks, although some do let cash build up occasionally. They emphasize growth companies, give little or no consideration to whether the stocks pay dividends, and may turn over their portfolios once a year -- or even more often.
FTC The accompanying table indicates how well they rewarded investors for accepting their riskiness. But it only hints at the funds' volatility.Invest only if you can hold them long enough to ride out the inevitable fluctuations.
Take Twentieth Century's Ultra Investors, which had an average annual return of 26.2 percent in the last five years. Ultra was down in as many as seven of the 20 calendar quarters making up the period. Its worst was the third quarter of 1990, when the fund had a negative return of 16.2 percent. The best: 40.8 percent in the first quarter of 1991, a year in which it finished with 86.5 percent.
Whether up or down, Twentieth Century's management has stayed with the same basic strategy to produce Ultra's superior -- but bumpy -- performance. Managers try to find small-to-medium companies that are growing very quickly.
Some stocks in the portfolio underperformed last year -- resulting in a return of only 1.3 percent. But Investors Research Corp., the fund's investment manager, says the companies' earnings and other fundamentals continue to meet its criteria.
Still, executive vice president James E. Stowers III says the fund's growth -- it has more than $4 billion in net assets -- has made it tough to maintain an orientation to smaller firms.
The problem: striking a balance between buying enough of a promising small company's shares to significantly boost Ultra's performance and buying too many. To avoid the latter, Stowers limits Ultra to 10 percent of a firm's outstanding shares.
Managers of other leading capital appreciation funds try to achieve maximum growth in different ways.
Thomas F. Marsico, manager of Janus Twenty, may make big bets when he sees growth stocks he likes. He remains concentrated in about 25 positions, one-third of Ultra's.
AIM Constellation's portfolio of small and medium-size companies' stocks is divided into two categories: 70 percent in companies with accelerating earnings and 30 percent in firms with earnings growth rates that are twice the market average.
Harold J. Ireland, Jr., portfolio manager of ABT Emerging Growth Fund, considers himself "in a mid-cap mode." He studies companies with records of annual earnings and sales growth of 20 percent and returns on equity of at least 20 percent to identify those that are increasing market share.
James P. Craig, manager of the $5 billion Janus Fund, the group's largest, seeks companies whose earnings should benefit from emerging trends, such as the drive to cut costs. Among about 55 stocks, he has large holdings in banks, railroads, and Merrill Lynch; he recently initiated positions in technology.
1993 By WERNER RENBERG