Value stock, junk bond funds excelled in 1st quarter Analysis provides glimpse of results

MUTUAL FUNDS

April 11, 1993|By WERNER RENBERG | WERNER RENBERG,1993 By WERNER RENBERG

When you reviewed your mutual fund portfolio at the start of 1993, to see whether you should invest in an additional fund or make any other changes, you probably looked at the market and found:

* Money market fund interest rates were low, as economic recovery remained tepid and the annual inflation rate stayed around 3 percent.

* The 7.4 percent yield on 30-year U.S. Treasury bonds far exceeded the 3.15 percent yield on three-month Treasury bills -- and exceeded inflation handily, too.

* Common stocks, as measured by the Standard & Poor's 500 Index, provided a below-average 7.6 percent total return in 1992. "Value" stocks outperformed growth stocks, and stocks of small- and medium-capitalization companies outperformed "large-caps."

* The U.S. stock market beat the average performance of foreign markets, which were down 12.2 percent in U.S. dollar terms, according to Morgan Stanley Capital International's EAFE Index.

* Stocks constituting the S&P 500 were selling, on the average, at a high (24.1) multiple of the companies' latest reported earnings and were yielding an average of only 2.9 percent.

Given the prospects of continuing gradual recovery -- and some analysts' projections that annual returns for stocks and bonds might slip below 10 percent in the 1990s -- you may have decided to make a change or two.

Among the possibilities: cut your money market fund allocation, add to your bond fund account or get into a bond fund if you weren't already in one -- a municipal bond fund, if you expected President Clinton and Congress to raise your federal tax rate -- and add a small- or medium-cap stock fund, preferably one that goes for value stocks.

Feeling that U.S. stock prices were vulnerable to correction and that foreign stock markets were bound to recover, you also might have decided to put some money into an international fund.

When the first quarter performance data for individual funds become available, you'll see what such tactics could have achieved.

But looking at the fund group averages calculated by Lipper Analytical Services, you already can get a rough idea of what to expect.

With money market fund yields sliding below 3 percent, a switch to bond funds would have been rewarding -- perhaps even more rewarding than a switch to equity funds.

Funds invested in investment-grade bonds of long maturities to earn higher yields, such as those included in the A-rated corporate and general municipal bond fund groups, had a fine quarter. They posted returns of 4.8 percent and 3.8 percent, respectively.

If you had been uneasy about the risk associated with long-term bonds and had gone for an intermediate-term (five to 10 years) bond fund, you also would have done well. The average intermediate-term investment grade fund, for example, had a three-month return of 4.2 percent, matching the Salomon Bros. index.

If, on the other hand, you would have accepted the greater credit risk of a high-yield (or "junk") bond fund, you would have fared even better. The group's average 7.1 percent total return for the last three months was second highest of all fixed-income fund groups tracked by Lipper.

Investing in an equity fund that emphasizes value stocks should have worked out well, as value stocks outperformed growth stocks, 9.9 percent vs. minus 0.2 percent, over the quarter, according to the S&P/BARRA indices.

The sharp contrast extended across the range of capitalizations. Wilshire Associates' large, "mid-cap," and small value stock indices had three-month returns of 10.5 percent to 9.2 percent, compared with returns ranging from 1.9 to minus 1.3 percent for its growth stock indices.

Among Lipper categories, the growth and income group comes closest to the value concept, and funds in that group may invest in companies ranging from the largest to the smallest. Its average return of 4.4 percent for the quarter, while far short of the averages of "pure" groups of value stocks, did match the S&P 500.

The growth fund and small-company growth fund groups scored quarterly average returns of only 2 percent or so -- not exciting but positive.

Significantly better quarterly results were reported by international funds. While their average return of 8.8 percent lagged the 12.0 percent of Morgan Stanley's EAFE Index, it exceeded the average annual return of the past five years. The largest contributor: Japan's stock market, with an 18.6 percent return.

Looking at the market these days, you may not find that conditions have changed enough to warrant modifying your portfolio. But make sure your funds are performing as well as can be expected to help you realize your goals.

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