Fund investors rewarded by late surge

Mutual funds

January 17, 1999|By Kathy Bergen | Kathy Bergen,CHICAGO TRIBUNE

While mutual fund investors may have lost their lunches during the roller-coaster ride of the third quarter, their appetites came roaring back in the fourth quarter, pushing returns on growth-oriented funds skyward for the year.

"There is just a tidal wave of enthusiasm for big, dominant U.S. growth stocks, particularly technology stocks, and woe to anyone who gets in their way," said John Rekenthaler, research director at Morningstar Inc., the Chicago-based fund research house.

Mutual funds specializing in technology stocks roared back in the fourth quarter to return 47.9 percent for the year, according to preliminary Morningstar data.

Funds investing in communications companies came in second, with total return up 43.3 percent for the year, followed by funds investing in large growth companies, up 35.7 percent for the year.

Driving these remarkable returns, experts say, were run-ups at huge, world-dominant technology companies such as America Online Inc., Cisco Systems Inc., Dell Computer Corp., Lucent Technologies Inc., Microsoft Corp. and Oracle Corp.

Telecommunications giants such as AT&T Corp. and MCI WorldCom Inc. also did their share, as did behemoth drug companies such as Pfizer Inc.

And for technology funds, in particular, spectacular returns on the titans were boosted even more by a wild run-up in some more speculative Internet stocks, noted Bob LaFleur, chief investment strategist at Northern Trust Co.

Investors have been drawn to growth-oriented multinationals for two reasons, experts say.

"People have been concerned about Asia, Russia, recession, deflation, so they tend to put their money into big-name stocks that they felt were better quality, and that they had heard of," said Al Kugel, senior investment strategist at Stein Roe & Farnham in Chicago.

And, "Investors are still looking for growth in a world where earnings growth is slowing, and it's hard to find," LaFleur said.

The problem, he said, is that many stocks have become "very, very expensive. It doesn't mean it can't go higher, but to us, it looks dicey."

Still, he notes the skyrocketing of stock prices has been extremely narrow, affecting only the largest of companies.

What this means, for equity mutual funds, is that overall performance was not as gung-ho as it was within the growth sector.

Diversified domestic equity funds on average returned 14.5 percent, not a bad return by historic terms, but the lowest level since 1994, according to preliminary data from Morningstar.

"Most of the major funds returned in the 20 percent area," said Rekenthaler, "but there are many, many smaller funds that own smaller-company stocks that had weaker performances. It reflects how narrow the market was."

Investors' love affair with technology did extend to some smaller players in the fourth quarter, with funds specializing in midsize and small growth-company stocks returning an average 26 percent and 24 percent, respectively.

Still, for 1998, those two categories, with average total return of 17.7 percent for midsize and 4.38 percent for small, significantly lagged behind the 35.7 percent return on large growth-company funds.

For those owning small growth-company funds, "It was either a quarter to celebrate, because they made money, or to mourn, because they were whipped again," said Rekenthaler.

Another trampled fund sector that made a nice comeback in the fourth quarter was the Pacific Rim -- excluding Japan, which was up nearly 25 percent, though still down 10.7 percent for the year.

"They had a huge rally in October and November in view of the fact that the Federal Reserve Board cut interest rates three times, which took pressure off their currency," LaFleur said.

"The stocks were so beaten down [that] they were ready to rebound," Rekenthaler added.

Bruised funds specializing in emerging markets and Latin America also recovered a bit in the fourth quarter, though they remained at the bottom of the fund heap for the year.

Funds that invest in Japanese companies revived in the quarter, with total return up 19.5 percent, bringing the return for 1998 into positive territory, at 7.5 percent.

The turnaround was due primarily to a sharp recovery of the yen, said LaFleur. "The yen was up 16 percent this quarter, and the market was up only 4 percent."

Pub Date: 1/17/99

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