Time to take hard look at your funds' results



As second-quarter total return data for your mutual funds become available, you'll be able to get a fresh reading on their performance -- in absolute terms and in comparison with both their categories' averages and relevant indexes of stock and bond prices.

Although your funds may have been flat or down slightly, you may be reassured if their performance for the quarter, as well as for the latest 12-month and five-year periods, exceeded that of their peers and of indexes that reflect the markets in which they are invested.

However, if a fund has disappointed you again, significantly lagging its group's average and its benchmark index for another calendar quarter, you may wish to consider replacing it after checking on the reasons and on the prospects for recovery. (You'll also want to weigh possible capital gains tax and transaction costs.)

Can you relax after taking these quarterly steps to monitor -- and possibly adjust -- your fund portfolio to keep it on track toward your investment goals?

Perhaps -- if you have a long investment horizon and can accept the level of risk that's inherent in your portfolio.

But if your circumstances -- years from retirement or from the time you expect to redeem fund shares for another purpose -- indicate the need, you may also want to study your equity funds' market phase performance characteristics and, if called for, make some changes.

You'll find it easy to understand why. Just as some equity fund groups do better than others when the stock market is in an up phase (as, of course, do individual funds within the groups), some equity fund groups outperform others when it's in a down phase. Their share prices may also go down, but they don't go down as much.

Thus, if you expect a down market but want to maintain a certain portion of your portfolio in equity funds, it may be prudent to be at least partially invested in one or more funds that are likely (but not guaranteed!) to hold up better.

Many have been predicting a down market for some time on the basis of data such as those reflecting the relationships of stock prices to companies' earnings, the book values of their assets, or their dividends. Moreover, as the up market becomes longer with each passing month, some regard its very length a reason to expect a drop.

Whether the bears are right or wrong for now, where do you find equity funds that have achieved above-average down-market returns?

* Standard & Poor's/Lipper Mutual Fund ProFiles, which S&P and Lipper Analytical Services publish quarterly, carries ratings for many funds for the most recent up and down market phases. Most recent issue: May.

* Money, which includes Lipper return data for the most recent phases for top-performing funds in its annual (February) fund-ratings feature.

* Forbes, which provides up and down market performance grades for many funds in its annual fund survey. Most recent: Aug. 31, 1992.

* CDA Investment Technologies, which publishes its up and down market returns and rankings monthly for many funds in CDA/Wiesenberger Mutual Funds Update and supplements to CDA Mutual Fund Report.

* The 1993 Individual Investor's Guide to No-Load Mutual Funds, which is published annually by the American Association of Individual Investors, offering bull and bear market returns and rankings for no-load funds.

Lipper defines stock market phases as periods during which its Lipper Growth Fund index had a total return movement of 10 percent or more since the last turning point. The current up phase began on Oct. 11, 1990, when the index was at 409.70. The index has gone up about 75 percent since. During its last down phase -- July 12 to Oct. 11, 1990 -- it had fallen about 21 percent.

Using different methods to define stock market cycles, the others have come up with different periods. AAII defined the last bear market as the first nine months of 1990; CDA, as the five months from June through October 1990. Forbes, on the other hand, has not treated the 1990 drop as an interruption in a long bull market. It tagged the three months from Aug. 31 to Nov. 30, 1987, as the latest bear market.

What kinds of equity funds have fared best during down phases?

Equity income funds performed, on the average, better than other general equity fund groups, according to Lipper analyses of market phase data for the past 18 years, and utility funds outperformed them. Pacific Region funds led those concentrated in foreign stocks.

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