3rd quarter was nice time to be in most mutual funds


October 06, 1997|By Bill Deener | Bill Deener,Dallas Morning News

MOST mutual fund investors who had the good sense to avoid Asia and gold had easy pickings in the third quarter.

With only a handful of exceptions, almost every category of mutual funds posted impressive gains in the three-month period that ended Sept. 30. Funds that invested in the smallest U.S. companies, the so-called micro-cap and small-cap funds, along with technology funds, were the biggest gainers.

According to figures compiled by Lipper Analytical Services Inc., micro-cap funds gained 20.62 percent, and small-cap funds gained 16.41 percent in the quarter.

Funds that invest in technology stocks gained 19.72 percent.

"We finally have a rebound in the small companies after a difficult start of the year," said Greg McCrickard, portfolio manager for T. Rowe Price's Small Cap Stock Fund. "After being underperformers for a long time, it's their time now."

Investors have made up a lot of ground during the past six months after a rather anemic first quarter, when the average equity fund lost 2 percent and small-cap funds lost nearly 7 percent. The average stock fund gained 11.67 percent in the third quarter, according to Lipper Analytical.

That was the second consecutive double-digit quarterly gain for general equity funds, although still well below the 15.3 percent return of the previous quarter.

This was the first time since last year that the average stock fund outperformed the Standard & Poor's 500 index, which was up 7.46 percent in the third quarter.

In other words, portfolio managers who actively manage stock funds finally have something to boast about.

That is, unless they invested in the Asian markets, especially Japan. Pacific region funds tumbled 11.22 percent in the quarter, as Japan continues to languish in recession and Malaysia and Thailand are in the throes of currency crises.

The Japanese market was down 13 percent in the quarter, and benchmark indexes in Thailand, the Philippines and Malaysia are all down about 50 percent in dollar terms so far this year.

"Japan has almost been in a depression since the big real estate and stock bubbles burst in 1989," said Dan Ascani, editor of Global Market Strategist.

"They have spent the entire decade trying to recover from that."

Amit Khandwala, international fund lead manager at Wright Investors Service, said increasing Japan's consumption tax from 3 percent to 5 percent this year has made things worse.

"Consumer demand was weak anyway, then the government did the worst thing possible -- increase the tax rate," said Khandwala.

When gold didn't glitter

Gold funds, which invest primarily in shares of gold-mining companies, were the other area to avoid.

Overall, gold funds returned 1.08 percent in the quarter. But five of the 10 worst-performing funds were invested in gold, and most incurred losses of more than 30 percent.

And this sector, along with Pacific region funds, was showing year-to-date losses.

The rally in the small- and micro-cap sectors, which began in June, was long overdue, said McCrickard.

In the year ended April 30, small-cap stocks were basically flat, compared with a 25 percent return for the large-cap stocks of the S&P 500.

"That was the worst performance relative to the S&P 500 since the 1930s," McCrickard said.

The rebound was a result of improved earnings outlook among smaller companies, while the earnings growth of larger companies is slowing, he said.

Tech funds get moving

Technology funds have been on a roll after being routed in the first quarter, when the average tech fund lost 7.9 percent. The Fidelity Select Computer fund led the sector with a quarterly gain of 30.2 percent.

Adam Hetnarski, manager of Fidelity Select Technology fund, said the strongest areas of the technology sector were personal-computer makers and semiconductor capital equipment companies.

Today, about 45 percent of the nation's capital expenditures go toward technology, compared with about 30 percent in 1990.

"It is definitely a growth industry," Hetnarski said.

Also hot were funds that invest in the financial services industry -- such as banks and brokerage firms -- and real estate.

Each sector reeled off quarterly gains of about 13 percent. These are interest-rate-sensitive sectors, which responded positively to the quarter's subdued inflation, portfolio managers said.

Among fixed-income funds, the best performance was turned in by junk bonds, which on average turned 4.8 percent in the quarter, according to preliminary figures from CDA/Wiesenberger of Rockville.

Dan Phelps, senior mutual fund analyst for CDA, said that, while these corporate bonds are called "junk," they are actually strong debt.

"With the economy expanding at a nice pace without much inflation, these are really good investments," Phelps said.

U.S. Treasury bond funds gained an average of 3.14 percent in the quarter, while investment-grade corporate bond funds gained 3.13 percent. And the average municipal bond fund gained 2.36 percent, according to CDA/Wiesenberger.

"It was a nice quarter for bonds," said Charles Smith, a managing director at T. Rowe Price.

Over the past years, bonds have returned an average yield of 9 percent. This quarter's returns would be well over 12 percent on an annualized basis, Smith said.

"If we continue to get a strong economy with low inflation, bonds won't be a bad place to be," he said.

Pub Date: 10/06/97

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