Growth stocks, bonds and real estate expected to bounce back in 1995


January 08, 1995|By New York Times News Service

Most mutual fund investors had a bad 1994, as stock funds lost just over 2.5 percent on average, and bond funds fell nearly twice that.

But 1995 looks more promising. Ballooning equity valuations have finally burst. And last year's growing economy, which prompted the Fed to raise interest rates six times, may at last be starting to slow down.

Given last year's tough markets, it is not surprising that the theme in 1995 fixes on rebounds. That's the common thread running through investments picked by the three advisers who were once again asked to craft model portfolios for the year ahead.

There's the anticipated revival in growth stocks. They offer good value relative to the overall market, and their earnings growth should become more attractive in this year's sluggish economy, the advisers say.

All three also assert that smaller-capitalization stocks are good values; that bonds, particularly hard hit in 1994, should begin to bounce back, and that real estate prices should be rebounding.

Columbia Growth is a core stock fund (20 percent) in John Rekenthaler's model portfolio for 1995. Mr. Rekenthaler, who edits Morningstar Mutual Funds in Chicago, says the fund's "multiples are reasonable relative to value stocks, and people will start to think more about a slowing economy this year, which is good for growth stocks."

He would also put 20 percent in IAI Regional, a midcap growth fund that survived a tough 1994. That's also a bet on smaller stocks bouncing back, as is Smallcap World (20 percent). It has half its portfolio invested domestically and the rest abroad, including smaller stocks in Europe, which Mr. Rekenthaler called good values now.

His core global position is Ivy International. Mr. Rekenthaler is willing to pay a steep 5.75 percent sales load for Ivy, which is managed by Haken Castegren, who also runs Harbor International.

Mr. Rekenthaler calls Harbor "the most consistently successful international fund," but it is closed to new investors. Last fall, Mr. Castegren had Ivy invested in few Japanese and German stocks and split 16 percent equally among South African and Swedish issues.

Mr. Rekenthaler's remaining 20 percent is invested in Fidelity Puritan, a conservative pick with holdings in bonds and high-yielding stocks (up 1.8 percent in 1994).

Growth stocks, big and small, account for more than a third of the model portfolio built by Ken Gregory, who edits the No-Load Fund Analyst in San Francisco. He invests 20 percent in Harbor Capital Appreciation to tap into big-cap growth stocks, which he calls very cheap relative to the overall market and which should profit as the economy slows. Strong Growth (15 percent) buys issues that are still reasonably valued and have good earnings

growth, he says.

Real estate investment trusts are coming off a bottom in real estate values and should benefit from a big inflow of capital from institutional investors, Mr. Gregory says. His pick: Cohen & Steers Realty Shares (15 percent), which has worked solely with REITs for more than 10 years.

Mr. Gregory sees plenty of opportunities internationally. While currency risk remains a worry, long-term exposure overseas is a must, he says. He likes Warburg Pincus International Equity (20 percent).

Emerging markets' bonds were hit hard at the start of 1994 but rebounded nicely as the year went on. Then the devaluation of the peso by Mexico at year-end hit the group hard again, even though most emerging markets debt is dollar-denominated. Mr. Gregory bets on another rebound in 1995 with a 10 percent stake in Fidelity New Markets Income Fund.

As for domestic bonds, they should be far more stable in 1995, returning between 7 percent and 10 percent, Mr. Gregory says. He likes Pimco Total Return (20 percent), whose high minimum investment can be avoided by buying shares through a discount broker.

Harbor Bond, a higher-expense alternative managed by the same firm, can be bought directly with a $2,000 minimum.

Domestic bonds also look like bargains to Anthony Ogorek, an investment adviser in Buffalo. He taps into the market using the Vanguard Total Bond Market Index, a proxy for the United States bond market and 20 percent of his portfolio.

Overseas investments are imperative, he says, with so much of the world's capitalization outside the United States. He would allocate 15 percent to the T. Rowe Price International Stock Fund, which has ranked in the top 6 percent of all foreign stock funds the last decade, he adds.

Among domestic stocks, Mr. Ogorek sees several potential revivals among beaten-down groups. Electric utilities were off almost 20 percent last year, and he would look for a rebound using the Stratton Monthly Dividend Fund (20 percent). He also looks for a rebound in REITs in 1995 using Cohens & Steers Realty Shares 15 percent).

To tap into smaller capitalization stocks, Mr. Ogorek recommends Strong Growth (15 percent) and Parnassus (15 percent). Parnassus, a "socially responsible" fund, is currently moving into undervalued market sectors like health care, he says.

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