Picking the winners for 1992 - mutual funds; includes glossary of investing terms

Black Enterprise, April, 1992 by Tom Toolen

Wall Street pundits all agree that stock mutual funds were a good place to have money invested last year. But they add a very large caveat: Don't expect a repeat performance this year.

Drive by a strong rebound in small company issues, stock mutual funds outpaced the broad market averages in 1991 for the first time since 1982, gaining 31.4%. This compared with the 30.4% gain by Standard & Poor's 500 Stock Index and 25.2% for the Dow Jones Industrial Average.

Some sectoral funds clearly left the field in the dust in 1991. The big winners were in health care and biotechnology mutual funds, which drummed up 74.3%, financial services funds, 60.6% and small-growth funds, 51.7%. The Oppenheimer Global Bio-Tech Fund turned in the best performance in 1991--with a total return of 121.13% for the year.

Unfortunately for investors, all that glitters is not gold. And those funds that were hot last year could end up as flops this year. "It is crazy for people to talk about switching funds because they only got a 30% return," says John Rekenthaler, editor of Chicago-based Morningstar Mutual Funds. "Some funds had a 60% or 70% return in 1991, but that's truly rare. People ought not to forget how good a 20% or 30% return really is in terms of mutual funds."

Driving home Rekenthaler's point, the Oppenheimer Global Bio-Tech Fund was closed to new investors last year, partly because of Oppenheimer's concern that investors' expectations were getting out of hand.

Rekenthaler says that the only way to judge mutual funds is to measure a particular fund's long-term performance over five or 10 years. "The investor will do very well by staying diversified in mutual funds for the long haul." So, anyone looking to buy funds this year should invest in funds with staying power.

Pick Of The Litter

Despite the recession and the lack of consumer confidence nationwide, money continued to pour into mutual funds in 1991. Today, a total of $1.32 trillion is invested in mutual funds. Because of their convenience and track record, mutual funds remain the investment choice for many families. It is estimated that at least one in four American households owns a mutual fund.

For a relatively moderate financial outlay (some funds accept initial deposits of $500 or less), mutual funds pool money from thousands of investors. This allows the individual investor to buy into a separate group of stocks, bonds or money-market securities, or a mix of all three. Other funds specialize in certain geographic regions, sectors or industries (i.e., health, technology or energy). A professional money manager handles the assets and chooses the investments in the mutual fund. Some funds have a sales charge (load), which can be as high as 8.5% of the amount that's invested.

Mutual funds are an attractive device for entering the financial market at any time, says John Markese, research director for the Chicago-based American Association of Institutional Investors. Obviously, many investors agree. During 1991, total sales of mutual funds were $234.5 billion, whereas the previous year, total sales were $149.5 billion, according to the most current figures available from the Investment Company Institute in Washington, D.C., which has 3,200 member firms.

Most of the rise in mutual fund sales resulted from inflows into money-market funds, says Jacob S. Dreyer, vice president and chief economist at the Investment Company Institute. "They [money-market funds] kept attracting money," says Dreyer, "even though short-term yields were at their lowest level since the early 1970s." The assets of shortterm funds (money-market funds, both taxable and tax-exempt) rose to $560.8 billion by November 1991.

Apropos of stock mutual funds, sales totaled $12.9 billion in 1991, compared with $7.2 billion the previous year. Granted, there was a slight drop in equity funds toward the end of the month, probably caused by a drop in consumer confidence, say financial experts. but then the stock market took off again before year-end, causing investors to revisit equity funds, says the Investment Company Institute's Betty Hart. "People were probably figuring they would park the money in money-market funds until they saw which way the economy was heading," Hart says. Approximately $31 billion was invested in stock mutual funds during the first 11 months of 1991. But about twice that amount--$63.4 billion--was flooded into bond funds during the first 11 months of 1991. "The public showed by their pocketbooks that they were confident that their money was safe and growing in mutual funds," Hart adds.

The Road Ahead

More than likely, say financial experts, higher-risk mutual funds will not reward investors the way they did in 1991. Similar sectors are expected to continue to do well this year, but none are predicted to produce last year's lofty returns.

Many experts believe the small-growth stock resurgence will continue this year. Last year was a perfect environment for financial stocks, "but can it get more perfect?" asks Scott Offen, an analyst with Boston-based Fidelity Select Brokerage and Investment Management. "Maybe."