A Very Good Year Especially On The Fringes

The hottest mutual fund action in 1993 was not in the U.S. but overseas. The average equity mutual fund was up 16.5%, besting the 9.25% total return in the Standard & Poor's 500-stock index. But a good share of that boost came from the stellar performance of international equity funds. These include Pacific funds, European funds, foreign funds (which only invest abroad), and world funds (which invest both abroad and in the U.S.).

International funds were by no means the only winners. All in all, "it has been a very good year across the board," says analyst John Rekenthaler of Morningstar Inc., the data company that tabulates fund performance for BUSINESS WEEK. Yet in both equity and bond funds, he adds, "you were best off on the fringes. Returns were strong in part due to more aggressive specialty investments." That included not just overseas funds but those focusing on gold, small companies, natural resources, convertible issues, and high-yield and international bonds.

Equity funds, though, generally did very well compared with the overall market. While U.S. diversified equity funds were up only 10.8%, they still beat the S&P. That wasn't bad considering that in most years they lag the S&P, on average, by about two percentage points. Out of 19 stock-fund categories, all but one beat the S&P index and 16 made double-digit gains.

The hottest new kind of mutual fund category was emerging markets. Many of those funds are Pacific Basin funds, which were up an average of 49%. Some brand-new funds, such as Fidelity Emerging Markets and Newport Tiger funds, which invest in countries such as Hong Kong, Malaysia, and Singapore, topped the charts with returns of more than 60%. Many of the largest equity mutual funds also boosted their returns by putting some of their assets to work overseas. The EuroPacific Growth fund, from Los Angeles-based Capital Research & Management, was up 31.7%. International bond funds were big winners as well. While low rates made the money-market crowd restless, world bond funds, which buy mainly non-U.S. issues, posted an average 15.4% return.

Precious-metals funds topped the charts, with a 78.6% rise. Half of the top 50 list were gold funds. Because of the many mining stocks that trade there, the American Stock Exchange was up 16.8%. By far, the top fund of 1993 was Lexington Strategic Investments, which was up 248%. It invests only in South African gold shares and has done well by buying undervalued mining companies that have appreciated along with rising gold prices.

But gold tends to be a very volatile and risky category. How volatile? In 1992, Lexington was the worst fund--off almost 60%. Even so, Caesar M.P. Bryan, the fund's manager, remains guardedly bullish. "I still think the fund is very well placed if we get gradually appreciating gold prices," he says.

Indeed, most categories of equity mutual funds did quite well. After gold, technology funds were the best specialty funds, up 20.6%. And natural-resource funds posted an 18.2% gain, driven by higher U.S. natural-gas prices. Brian Posner, who manages Fidelity's Equity-Income II fund, says that continued tight supply of natural gas and rising oil prices, which he thinks have bottomed out, could mean continued gains for this


Part of the solid performance of several of Fidelity's biggest funds, in fact, can be credited to their bets on natural resources and technology. The two biggest holdings of the Magellan Fund, which was up 22%, were semiconductor companies, such as Motorola and Texas Instruments, and natural-gas companies, such as Burlington Resources. Magellan also had a big position in U.S. Treasury bonds when they took off. Now, Magellan's Jeff Vinik is building up a major position in automotive stocks, as well as a few special situations, including Sears, Roebuck & Co. and Lowe's Cos.

CRITICAL CARE. It was midsize growth stocks that drove the Twentieth Century Ultra Fund, which was up 19.5% in 1993. That's on the heels of the fund's measly 1.3% gain in 1992. The fund's biggest positions were in communications, computer software, and semiconductors. Now the fund is rotating into smaller, faster-growing names in these and other sectors to keep up with the fund's huge growth from $400 million to $8 billion in the last three years. "As long as the economy holds up, and people don't shy away from stocks, and rates stay low, stocks offer relatively attractive total returns that will last for the next year to two years," says James Stowers III, the president of the Twentieth Century Investors Inc.

The worst performers were health-care funds, which were up 0.2%. Largely due to uncertainty about President Clinton's health-care reform plan, the list of worst-performing funds were littered with names like Invesco Strategic Health Sciences, Merrill Lynch Healthcare, and Putnam Health Sciences. But Jordan Schreiber, the manager of Merrill Lynch Healthcare fund, sees some bright spots in the coming year. He is focusing on certain HMOs, biotech companies, and foreign health-care stocks. The group "will be up 4% to 5%" in 1994, says Schreiber.

This year's healthy returns weren't lost on yield-hungry investors. Equity mutual funds took in a record $104.2 billion through Oct. 31, besting 1992's total inflow of $78.1 billion. And bond funds took in $103.8 billion, compared with $93.5 billion in 1992. Most of all, 1993 will be remembered as the year international investing caught fire. Some $22.5 billion went into global funds, compared with $2.3 billion in 1992, with most of that going into global stock funds, says the Investment Company Institute.

Though ICI doesn't track inflows for the emerging market funds, they certainly attracted big sums from investors. But even the pros admit emerging markets will have a tough time continuing at this torrid pace. For years, these markets languished outside the investment mainstream. But in 1993, that all changed. "A lot of that value has been recognized this year. We won't have 50% to 100% returns," in 1994, says Madhav Dhar, who runs Morgan Stanley's Institutional Emerging Markets and Asian Equity Funds. "Expect a more sober 15% to 20%." Dhar's biggest position in the Emerging Markets fund was in Brazil, whose market went up 120% in 1993.

Among bond funds, GT Global High Income headed the charts, with a 48.5% gain. It invests in junk debt issued by governments of developing countries. Its biggest and most profitable positions were in Latin American debt and also Moroccan, Polish, and Nigerian government debt, all of which is below investment grade. While there is still lots of potential for these and other fledgling markets, 1993 will be hard to beat, since prices fell dramatically as world investors recognized their value. "We won't do as well in performance terms," says Robert Allen, a senior vice president for GT Capital Management, who expects returns in the 15% to 20% range next year.

High-yield, or junk, bond funds turned in an average 18.1%. The economic recovery and low interest rates and inflation mean improved credit quality, higher earnings, and lower coupons for junk issuers. "1994 will be good but not as good as 1993," says Peter Avellar, who manages the Dean Witter High-Yield Securities fund, which was up 30.2%. He sees returns in the 13% to 15% range in 1994, which by far will top what's available in investment-grade bonds.

Evan R. Steen, manager of Paine- Webber's High-Income fund, which posted a return of 21.1% this year, says these favorable conditions will enable more companies to deleverage through refinancings and initial public offerings. Steen attributes the past performance of PaineWebber's fund to a strategy of buying junk issued by "stable improving" companies, rather than focusing on interest-rate sensitivity.

"VERY COMFORTABLE." Municipal bond funds, star performers in 1993 with an 11.4% return, should continue to shine in 1994, funds managers say. The two key reasons are the higher marginal federal income tax rate under the new tax law and the dramatically reduced supply of new issues. According to Thomas J. Fetter, director of municipal investments at Eaton Vance Management, which had four of the top 21 tax-free bond funds in 1993, the supply of new issues next year is likely to drop to about half of the nearly $300 billion issued in 1993. Although municipals may not produce the double-digit returns of the last few years, Fetter expects that returns next year will be "'very comfortable."

Boosted by declining interest rates, convertible bond funds also had a good year, with the average fund returning 14.4%. But Hugh H. Mullin, portfolio co-manager of the Putnam Convertible Income-Growth Trust, which posted a return of 15.9% in 1993, doesn't expect the convertible market to continue performing "at the same magnitude for the next couple of years."

Treasury-only funds that invest in zero-coupon bonds were among the other bond-fund leaders. Four Benham Target maturity funds posted returns of 22.6% to 41%. But watch out--because zero-coupon bonds do best when rates fall and get hammered when rates rise. With rates perhaps approaching an upturn, these are risky funds to own.

If the economy stays strong and rates stay low, 1994 could be another good year for mutual funds. But investors will find it tough matching 1993 returns, an unusual year when most money managers beat the averages.

                                    Total return*
      PACIFIC                          49.09
      FOREIGN                          34.65
      WORLD                            26.98
      EUROPE                           22.18
      SPECIALTY-TECHNOLOGY             20.62
      RESOURCES                        18.17
      SPECIALTY-MISCELLANEOUS          17.60
      SPECIALTY-FINANCIAL              15.09
      MAXIMUM GROWTH                   14.93
      ASSET ALLOCATION                 14.03
      SMALL COMPANY                    13.96%
      SPECIALTY-UTILITIES              13.17
      INCOME                           12.41
      EQUITY-INCOME                    12.22
      BALANCED                         10.20
      GROWTH                            9.82
      GROWTH & INCOME                   9.60
      SPECIALTY-HEALTH                  0.22
      DIVERSIFIED U.S. EQUITY          10.81
      ALL EQUITY FUNDS                  16.5
      S&P 500 INDEX                     9.25
      *Appreciation plus reinvested dividends and capital gains through Dec. 10       
                                     Assets*         Total return**
                                    Billions       1993      5-yr. avg.
      Fidelity Magellan             $30.33       22.04%       19.03%
      Investment Company 
      of America                     18.59        10.22        14.42
      Washington Mutual 
      Investors                      12.36        11.65        13.31
      Vanguard/Windsor               10.42        18.52        11.29
      Income Fund of 
      America                        10.03        12.11        13.22
      Janus                           9.07        10.39        19.72
      Fidelity Puritan                8.64        20.30        14.17
      Fidelity Asset Manager          8.18        20.81        15.39
      Vanguard Index 500             $8.09       9.18%         14.26%
      Vanguard/Wellington             7.92        12.66        12.24
      Twentieth Century 
      Ultra Investors                 7.84        19.48        28.27
      Vanguard/Windsor II             7.48        13.48        13.43
      Fidelity Growth 
      & Income                        7.27       17.75         17.75
      Fidelity Equity-Income          6.41        19.34        12.58
      Dean Witter Dividend 
      Growth Secs.                    6.38       13.24         13.87
      Wellesley Income                5.84        14.51        13.59
      Fidelity Contrafund            $5.79        19.07 %      26.01%
      Putnam Fund for 
      Growth & Income A               5.19        13.44        13.49
      American Mutual                 5.17        13.23        12.88
      EuroPacific Growth              5.09        31.68        14.86
      Growth Fund of America          4.95        12.41        15.94
      Twentieth Century
      Select Investors                4.92        13.51        14.21
      Fidelity Equity-Income II       4.80        17.42         NA
      AIM Weingarten                  4.79        0.98         16.36
      Prudential Utility B            4.74        13.82        13.71
      * As of Sept. 30       ** Includes dividends and capital gains
      THE BEST
                                                   Total return
            Lexington Strategic Investments           248.05 %
            United Services Gold                      109.30
            Van Eck International Investors           103.49
            Fidelity Select Precious Metals           101.04
            Blanchard Precious Metals                  99.79
            Excel Midas Gold                           95.74
            Keystone Precious Metals                   94.32
            United Services World Gold                 85.38
            Morgan Stanley Instl. Asian Equity         84.07
            Thomson Prec. Metals & Res. A              83.41
            Vanguard Gold/Prec. Metals                 83.15
            Bull & Bear Gold Investors                 81.67
            Benham Gold Equities Index                 80.53
            Lexington Goldfund                         78.41
            Fidelity Select American Gold              78.38
            DFA Pacific Rim Small Company              77.29
            IDS Precious Metals                        75.46
            Dean Witter Pacific Growth                 74.96
            Van Eck Gold/Resources                     74.93
            Lexington Strategic Silver                 72.61
            Invesco Strategic Gold                     72.38
            Morgan Stanley Instl. Emerging             70.94
            Merrill Lynch Dragon A                     70.55
            United Gold & Government                   70.53
            Pioneer Gold                               68.89
            Franklin Gold                              66.90
            Eaton Vance Greater China Growth           66.84
            Fidelity Emerging Markets                  66.07
            T. Rowe Price New Asia                     65.22
            GAM International                          63.91
            EquiFund Hong Kong Natl. Fid. Equity       63.54
            Govett Emerging Markets                    62.88
            Templeton Developing Markets               62.31
            Scudder Latin America                      61.04
            Newport Tiger                              60.31
            Smith Barney Shearson Prec. Met. & Min. A  58.64
            59 Wall Street Pacific Basin Equity        58.60
            GAM Global                                 58.52
            John Hancock Freedom Pacific Basin         58.17
            USAA Investment Gold                       56.50
            Prudential Pacific Growth A                56.32
            Mackenzie Canada                           56.31
            Oppenheimer Gold & Special Minerals        55.71
            Scudder Gold                               54.77
            Merrill Lynch Developing Capital Mkt.      54.51
            Dean Witter Prec. Metals and Minerals      53.68
            Fidelity Pacific Basin                     53.36
            Govett Smaller Companies                   51.70
            G.T. Global Emerging Markets A             51.02
            Rushmore Precious Metals Index Plus        50.55
                                                    Total return
            Pilgrim Corporate Utilities               -18.15%
            Invesco Strategic Health Sciences         -11.80 
            Dean Witter Capital Growth Securities     -10.53
            Invesco Strategic Environmental Svcs.     -10.00 
            Excel Value                                -8.85
            Jensen                                     -7.97
            Steadman Ocean. Technology                 -7.43
            Yacktman                                   -6.76
            Pasadena Growth                            -6.35
            Flag Investors Quality Growth              -6.34
            Reynolds Blue Chip Growth                  -5.93
            Principal Pres. Dividend Achievers         -5.87
            Kemper Environmental Services              -5.83
            Rainbow                                    -5.74
            Beacon Hill Mutual                         -5.68
            Voyageur Growth Stock                      -5.62
            Wasatch Mid-Cap                            -5.40
            Monitrend Summation                        -5.13
            Merrill Lynch Healthcare A                 -4.87
            Society Earnings Momentum Equity           -4.81
            Rightime Growth                            -4.74
            John Hancock Freedom Global Rx             -4.22
            Franklin Rising Dividends                  -4.19
            Eaton Vance Growth                         -3.96
            Morgan Stanley Instl. Emerging Growth      -3.88
            Dean Witter Equity-Income                  -3.77
            PaineWebber Dividend Growth A              -3.45
            Oppenheimer Global Bio-Tech                -3.13
            Putnam Health Sciences A                   -3.12
            Anchor Capital Accumulation                -2.82
            Flag Investors Emerging Growth             -2.76
            One Group Blue Chip Equity Fiduciary       -2.67
            MIM Stock Income                           -2.60
            Fountain Square Quality Growth             -2.53
            GAM North America                          -2.46
            Midwest Strategic Growth                   -2.46
            FAM Value                                  -2.34
            Boulevard Blue-Chip Growth                 -2.32
            Rightime Social Awareness                  -2.31
            John Hancock Freedom Environmental A       -2.15
            Blanchard American Equity                  -2.10
            Vanguard U.S. Growth                       -1.95
            Fidelity Select Biotechnology              -1.94
            First Investors Made In The U.S.A.         -1.82
            Dreyfus-Wilshire Target Large Co. Growth   -1.50
            Hawthorne Sea                              -1.47
            Charter Capital Blue Chip Growth           -1.40
            Fidelity Select Health Care                -1.32
            Reynolds Opportunity                       -1.29
            Fiduciary Exchange                         -1.25
      Appreciation plus reinvested dividends and capital gains, through December 
                                       Total return
      G.T. Global High-Income A          48.53%
      Benham Target Maturities 2020      40.97
      G.T. Global Strategic Income A     40.72
      Benham Target Maturities 2015      34.84
      Alliance Bond Corporate Bond A     30.64
      Dean Witter High-Yield Securities  30.17
      Keystone America Strategic
      Income A                           29.79
      Benham Target Maturities 2010      28.45
      FT International Income A          24.83
      MainStay Convertible               24.57
      Keystone Custodian B-4             24.30
      MAS High-Yield Securities          24.17
      G.T. Global Government Income A    23.98
      Fidelity Capital & Income          23.69
      Northeast Investors                22.88
      Bull & Bear Global Income          22.83
      Benham Target Maturities 2005      22.57
      Loomis Sayles Bond                 22.03
      Standish International 
      Fixed-Income                       21.91
      Morgan Stanley Instl. High-Yield   21.49
      Pacific Horizon Capital Income     21.36
      Average of 838 funds                9.88
                                       Total return
      Evergreen Insured National Tax-Free 15.72%
      Smith Barney Shearson Managed 
      Munis A                             15.40
      Cambridge Municipal Income A        15.01
      UST Master Long-Term T/E Non-Plan   14.86
      California Muni                     14.82
      Vista Tax-Free Income               14.73
      Transamerica Tax-Free Bond A        14.68
      Eaton Vance LA Tax-Free             14.68
      Sierra Trust National Municipal     14.61
      Flagship NY Tax-Exempt A            14.61
      Fidelity Spartan FL Municipal 
      Income                              14.43
      Van Kampen Merritt T/F 
      High-Income A                       14.42
      Lord Abbett Tax-Free Income PA      14.39
      MFS FL Municipal Bond A             14.26
      Rochester Fund Municipals           14.20
      California Investment Tax-Free 
      Income                              14.15
      MFS TX Municipal Bond A             14.15
      First Investors Multi-St. 
      Ins. T/F AZ                         14.07
      Eaton Vance AZ Tax-Free             14.05
      Eaton Vance National Municipals     14.03
      Eaton Vance TN Tax-Free             14.02
      Average of 694 funds                11.39
      *Appreciation plus reinvested dividends and capital gains through Dec. 10      
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