Look beyond the name when deciding whether to invest in a particular fund

MUTUAL FUNDS

January 22, 1995|By New York Times News Service

What's in a mutual fund's name? Sometimes not enough, Alan Wildstein, a Connecticut investor, found.

Mr. Wildstein bought shares in the Warburg, Pincus Growth and Income Fund on March 29. "I was looking for a fund that balanced the risks of a growth fund with the comparative safety of an income fund."

When the price dived 9 percent in less than a month, he considered the loss so acute -- similar funds fell roughly 2 percent in the period -- that he sold on April 20.

So when he read a newspaper report last month that the fund's yield was negligible and that it had owned a big chunk of volatile technology stocks, he was annoyed -- especially because the fund's share price bounced back after he had sold.

"I'm sure the manager didn't do anything he wasn't allowed to do," Mr. Wildstein said. "But the very name of the fund suggests a more conservative bent."

Also among the rudely surprised in 1994 were a whole slew of short-term bond investors who saw their funds' share prices tumble, even though their issues were expected to weather the rising interest rates better than longer-term ones.

The Fidelity Short-Term Bond fund lost more than 4 percent of its value last year while its peers fell just 0.8 percent, according to Morningstar Inc. The fund was hard hit by its emerging-markets debt -- more than a third of its holdings in 1994.

While the prospectus lets the fund do so, "I don't think all the shareholders knew they were so heavily invested in foreign debt," said Jeffrey R. Kelley, associate editor of Morningstar Mutual Funds in Chicago.

He added, "You'd think that a fund labeled 'short' would hold up in a rising interest rate environment."

Not Scudder Short-Term Bond, whose share price slipped to $10.94 from $12.01 last year, nearly 3 percent. Its problem involved big holdings in what Mr. Kelley termed "funky mortgages," like inverse floaters and private-label mortgages.

Similarly, derivatives caused large, well-publicized losses in several Piper Jaffray funds managed by Worth Bruntjen. He also manages the Managers Short and Intermediate Bond Fund, down 8.4 percent last year.

Derivative securities made many funds' durations creep up as interest rates rose, essentially turning short-term bond funds into longer-term ones.

Then there is MIM Bond Income, which paid no yield at all in 1994. That is because it owned no bonds, just convertible securities and stocks.

The name TCW/Dean Witter North American Government Income Fund suggests stability from government issues. But the fund's United States holdings are almost entirely mortgage securities, some of them private-label mortgages, which are not backed by the government.

The fund fell 15.5 percent in 1994, partly because of investments in Mexican government paper but mostly on account of mortgage derivatives.

Meanwhile, Alliance North American Income did exactly what its prospectus allowed: put 24 percent of its assets in government securities of Argentina. So why don't they call it the Alliance North American and Argentina Income Fund?

As the Warburg example showed, equity funds are not exempt from confusion.

Fidelity Blue Chip Growth, for example, was indeed "blue chip" until Michael Gordon took over in 1993. He shrunk the fund's average market capitalization to roughly a fifth of its previous size. The fund gained 24.5 percent in 1993, but not because it owned blue chip stocks.

Last year, the fund's average market capitalization rose to $4.4 billion, still just a third of the Standard & Poor's 500 stocks. And 30 percent was invested in technology stocks in 1994. That accounted for its great showing -- the fund gained 9.9 percent -- but it's still not a blue-chip fund.

What about IDS Managed Retirement? Most people like to think of their retirement funds stashed somewhere stable, especially older people who need to conserve capital.

But with wide latitude on its investments, IDS had 25 percent of its holdings overseas in 1994, a third of that, unfortunately, in Latin America and another third in Southeast Asia. Thus the fund lost 4.6 percent, compared with 1.4 percent for its group.

Consider also Alger Income and Growth, which hasn't paid investors a penny in three years because of its high expenses and penchant for owning growth stocks.

The upshot: don't take names for granted.

By law, a fund's name is based on its investing 65 percent or more of its assets in a given category. But "there's a lot you can do with the remaining 35 percent that overrides the other two-thirds in the wrong environment," Mr. Kelley said.

Reading the fund's prospectus helps, but not always because they are written so broadly. Better is to check a fund's annual or semiannual report to see what the manager is really doing.

And for bond fund investors, if your fund's yield is much higher than that of other funds, check it out. Something is probably going on that you may regret.

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