Win, lose or draw

Black Enterprise, April, 1996 by Juliette Fairley

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IF YOU'RE AMONG THE 38 MILLION PEOPLE WHO own mutual funds, you're probably still relishing the glory of last year's stellar performance. Time and time again, mutual funds proved to be a healthy choice for a well-balanced investment portfolio. Experts advise to always allocate a portion of your savings to funds, regardless of market shifts.

Most of you know by now that 1995 was the best of times for stock mutual funds. In fact, it was their best performance since their splendid gain of 35% in 1991. Last year, a $1,000 investment in stock mutual funds would have yielded about $300, with equity funds up 36%. Not bad, considering that, in general, the average annual return on mutual funds is 10%.

Driven by healthy corporate earnings and declining interest rates, mutual funds kept pace with broad market averages in 1995. In comparison, the Standard & Poor's 500 stock index gained 34% and the Russell 3000, 37%.

The rolling good times didn't stop on New Year's Eve. A record $24 billion went into equity mutual funds in January alone, according to the Investment Co. Institute (ICI) in Washington. As a result, the market surged 300 points. "Clearly there's a push from mutual funds into the market that is helping to fuel the rally. It's not the whole thing but it is a piece of it," says Jon Teall, a research coordinator with New York-based Lipper Analytical Services, which tracks the performance of mutual funds. "People are wondering if things are too high. The extraordinary rally we've seen in the last week or two has caused concern. There is a certain amount of excess in this move, but I don't know how much."

The top winners by sector included: health care/biotech funds, with gains of 46%; financial services funds, up 41%; and science/technology funds, up 38%. (The science/technology sector soared for much of 1995 but lost momentum in the fourth quarter.)

The technology shake-up left many investors wondering about the state of mutual funds in 1996. After a splendid journey in 1995, prudent financial gurus now caution: Fasten your seat belt, it's going to be a bumpy ride. The proposed budget bill could curb the economy. Fewer stocks appear likely to deliver superior returns, and it's projected that fewer industries will excel this year.

Not all is lost. Other financial pundits encourage you to still capitalize on promising funds. Don't be dismayed by market sways, just remember that mutual funds should be viewed as long-term investments, with a five- to 10-year commitment.

The goal is to have a mixed investment portfolio as a means for sending your children to college, building a nest egg, buying a home, traveling abroad and, in general, having a lifestyle that suits you and your family.

There's more money invested in mutual funds now than ever before; some $2.8 trillion, according to the ICI. "It's a sign that mutual funds are steadily increasing in popularity. New money coming in also means that assets are appreciating," says Elizabeth Tower, ICI's vice president.

Financial experts advise investors to put their money in funds with staying power and diversify their portfolios. Some funds saw a 60% to 70% return in 1995, but that's considered rare. Several analysts agree investors should welcome a 20%, or even 10%, gain in mutual funds this year.

THE YEAR AHEAD

Last year's industry success stories are expected to do well this year, but don't expect any lofty returns. In 1995, health and biotech funds benefited from drug companies that had higher yields. "Drug companies were forced to become better managed companies, which contributed to earnings, due to pressure from President Clinton's health care reform proposal," says Teall.

On the other hand, the financial services sector, comprised of banks, insurance companies and brokerage firms, benefited from lower interest rates. "There were also some very large mergers in the banking industry, which pushed stock prices up--so funds that owned those stocks did well," explained Teall.

Mirroring the gains made by financial services' stocks is Kemper-Dreman: High Return. The top-performing equity-income fund was up 46% in 1995; the $100 million fund holds 49 stocks.

Fund manager David Dreman has invested 45% of the high-yield fund's assets in financial services and 15% in health care. The fund's largest holdings, 12%, are Freddie Mac and Fannie Mae. Other stocks include BancOne, PNC and Columbia-Gas (up 87% in 1995).

"About 10% of our holdings were in technology last year, but we sold them in August just before the downturn," says Dreman. "We buy industries that are out of favor."