Pause before you leap on golden opportunity

MUTUAL FUNDS

November 07, 1993|By WERNER RENBERG

When a mutual fund has a total return of more than 200 percent in less than a year, as Lexington Strategic Investments Fund has had so far in 1993, there's a good chance that it will catch your attention.

You may not have noticed, however, that the fund had a negative total return of 60.7 percent in 1992.

Going from worst performer of all taxable funds in one year to top performer in the next is most interesting to shareholders.

But, for those who weren't on board for this roller coaster ride, the turnabout is of interest, too. It illustrates the volatility that can characterize equity funds whose investments are concentrated in one economic sector, such as gold production.

After years in which gold stock funds generally had lost money, they have soared this year. On average, gold funds are up by more than 60 percent, according to Lipper Analytical Services. United Services Gold Shares has come closest to the Lexington fund with a return of more than 90 percent. (In 1992, its negative 50.8 percent had been next to worst.)

But if you have read the advice of gurus who say a small portion of your fund portfolio (say 5 percent) should be in gold, think long and hard before acting.

Over the last five years, gold funds' returns averaged only 3 percent annually, far below the 14.7 percent of the Standard & Poor's 500 Index and the returns of well-managed, diversified stock funds.

Gold funds certainly have not served as a hedge against inflation in the recent past. All but seven have lagged the 3.9 percent annual increase in the consumer price index over the past five years.

Let's look behind the 1993 figures for gold funds, whose worst performer is up an otherwise respectable 16 percent. They reflect the major policy differences among the 29 funds tracked by Lipper -- differences that you should keep in mind if you're planning to invest.

All have benefited from the impact of higher gold prices earlier in the year -- and have given up some of gains as gold dropped from more than $400 an ounce to around $365. But some have done better than others, depending partly on the geographic distribution of their companies' operations and their diversification among companies.

Lexington Strategic Investments, which only invests in South African gold shares, has bounced back this year because South African gold shares have surged more than others, thanks to improvements in the country's political climate and its mines' profitability.

Since that pace can't be maintained indefinitely, Lexington Man

agement Corp., the fund's investment adviser since early 1992, is considering diversifying into securities of other South African zTC natural resources companies to moderate volatility, said Lawrence Kantor, executive vice president.

Among other funds, South African gold shares typically range from 10 percent to 40 percent of assets -- except for a few that, as a matter of policy, have not owned companies with South African operations.

The largest gold fund, $571-million Van Eck International Investors, is up more than 85 percent this year with an internationally diversified portfolio. About 40 percent of the holdings are based in South Africa, 25 percent in Canada, 19 percent in the U.S. and 7 percent in Australia. President Henry J. Bingham invests primarily in large mining companies because of the fund's size, but also tries to uncover values among small ones.

Bingham says gold shares are now fairly valued but, looking at supply-demand prospects, is convinced "we're in a long bull market for gold."

Benham Gold Equities Index Fund, one of the funds that is not

invested in South African companies, also has had a splendid year with a return of around 65 percent. It's managed to match the performance of the Benham North American Gold Equities Index and, thus, is concentrated in Canadian and U.S. stocks.

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