Global, small cap, value led equity funds in '93

MUTUAL FUNDS

January 09, 1994|By WERNER RENBERG | WERNER RENBERG,1994 By WERNER RENBERG

In 1993, the U.S. stock market slowed noticeably, falling well short of the 16 percent yearly increase of the previous decade.

The total return (price change plus income) for the Standard & Poor's 500 Index, the most widely used benchmark for measuring the market's performance, was 10.08 percent.

You also could have earned close to a 10 percent return last year by being invested in a fund that tracks an index reflecting the whole U.S. investment grade bond market, such as Salomon Bros.' Broad Investment-Grade Bond index.

But what sort of funds provided more than a 10 percent return? Those primarily invested in "value" stocks, small companies' stocks, foreign stocks, gold stocks, long-term bonds and high-yield bonds, among others.

If you were invested in a value-oriented equity fund -- focused on stocks thought to be selling for less than they are worth -- compare its return with the 18.6 percent of the S&P/BARRA Value Index. The index comprises S&P 500 stocks -- mostly in the energy, utility and financial sectors -- whose prices are lowest in relation to the book value.

(Allow for a 1 percent shortfall in consideration of your fund's operating expenses.)

By contrast, the tiny 1.7 percent return of the S&P/BARRA Growth Index failed to match inflation. The growth index, made up of consumer staples and other companies whose stocks have the highest price-to-book ratios, was down for the first three quarters before bouncing back in the fourth.

Both indices provide benchmarks for comparing the results of large-company funds that follow either of the two investment styles. You also can use the Russell 1000 Value and Growth indexes, whose returns were almost identical.

The growth index data should help you appreciate a growth fund manager who excelled while sticking to his discipline and put in perspective the performance of a growth fund that lagged the S&P 500.

Small company growth funds enjoyed another good year, averaging a total return of 16.9 percent, according to Lipper Analytical Services. That was 2 percent below the return of the Russell 2000, a widely followed index of small companies. Small company stocks showed similar value/growth relationships: Russell 2000 Value had a 23.8 percent return vs. 13.4 percent for Russell 2000 Growth.

How? Take Gary L. Pilgrim, who manages the no-load PBHG Growth Fund, which ranked first in Lipper's capital appreciation funds category with a total return of 46.6 percent.

Pilgrim seeks stocks of companies that demonstrate good earnings growth, among other things. Despite the slow pace of the economy, the earnings of the 90 companies he owns (of the 400 he follows) grew in the latest four quarters by an average of 62 percent.

He credits his 1993 showing to stocks in technology (semiconductors and networking), health care (managed-care companies), and consumer services (restaurants and health foods).

He concedes that his health care stocks dropped, but adds, "We ended the year with them making a major contribution to the fund. Some finished at the year's highs."

Unless you wanted to incur the high risk of gold funds, which averaged 80.9 percent after years of poor performance, you had to go abroad for 1993's really rich rewards.

Among 20 stock markets reflected in the Morgan Stanley Capital International Europe, Australia and Far East (EAFE) Index, the worstperformer (in U.S. dollars) was France, with a return of 21.6 percent -- over twice the S&P 500's. The best: Hong Kong, with 116.7 percent.

John R. Horseman, for example, managed GAM Global, the year's No. 1 global fund, and GAM International, the No. 3 international fund, to returns of 75.3 and 80 percent, respectively, by placing large bets on Hong Kong, his largest position, theUnited Kingdom, Singapore, and Switzerland. He owns little in Japan, he says, but admits to being "a little nervous being away from Japan."

Able to buy bonds when he finds stocks unattractive, Horseman also benefited from timely purchases of long-term issues. He began 1993 about 40 percent in bonds and sold them down to about 15 percent of assets by year's end, deploying the proceeds in Far East stocks.

For the 20 percent-25 percent U.S. portion of GAM Global, he has been leaning on two areas "that had fallen from favor": regional banks and health care (such as hospital services).

Looking at the U.S. market from his London base, he found bank stocks that were "cheap" and felt the market got too pessimistic about health care.

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