Speculative Stocks Stand Out as Mutual Funds Boom in Quarter
Thanks to the strong stock market, mutual fund investors have much to cheer about from the first quarter of 1987. But those cheering the loudest are those who took some of the biggest risks.
Funds investing in gold-mining stocks, aggressive-growth stocks and technology issues--all volatile sectors--were the standout performers in a quarter where every type of fund showed healthy gains, according to results compiled by Lipper Analytical Securities of New York.
“The first quarter was (like) a wonderful year,” said A. Michael Lipper, president of the mutual fund tracking firm, noting that the 19.22% gain for general equity funds and 14.66% gain for all funds in the first quarter alone topped the average annual gains of 11.55% for general equity funds since 1960 and the 13.39% gain for those funds in all of 1986.
Gold funds dominated the top-performing list, accounting for 16 of the top 20 funds and rising a whopping 49.4% for the quarter, thanks to investor worries about renewed inflation and speculation about future rises in gold prices.
Even the quarter’s laggards didn’t do too badly. The lowest performing group, fixed-income funds--which invest in bonds, government securities and other fixed-income investments--rose a relatively paltry 3.01%. But on an annualized basis, that would result in a healthy gain of more than 12%, far outdistancing current returns on Treasury securities and money-market funds.
The picture, however, did have some negatives. Equity funds underperformed the Standard & Poor’s 500 and the Dow Jones average of industrial stocks, which, with dividends reinvested, gained 21.35% and 22.51%, respectively. That continued a pattern that has been consistent since the current bull market began in mid-1982, a pattern some experts blame on the fact that the bull market has been led primarily by large-company stocks, while funds tend to invest in stocks of smaller companies.
And advisers cautioned that the quarter’s results would be difficult to sustain and that the big winners could easily be tomorrow’s losers.
“I do not expect a 19% gain per quarter for the rest of the year,” Lipper said, noting that such a sustained performance would reflect a doubling of stock market indexes during the year, which he called a “ridiculous extreme.”
“You wouldn’t want to base an investment decision on the first quarter,” said Joe Mansueto, president of Morningstar Inc., a Chicago firm that tracks mutual fund performance. He added that “yesterday’s goats were the first quarter’s heroes.”
Indeed, the hot bull market in the first quarter made temporary stars of some funds that had been laggards while making laggards of some former stars.
“We had an overheated market that was finally willing to pay up” for speculative stocks over more conservative stocks, said Michael D. Hirsch, chief investment officer for Republic National Bank of New York, who manages private accounts invested in mutual funds.
The 44 Wall Street fund, for example, chalked up a healthy 31.72% gain in the quarter. But the fund, which invests in a relatively small number of mostly speculative stocks, still ranks as the top loser for the past five years, with a loss of 48.44%.
Science and technology funds also rank in the temporary star list. They gained 26.39% in the quarter, thanks to sharp rises in stocks of semiconductor firms and other high-technology companies. But they generally have lagged behind other equity funds for most of the current bull market, posting a gain of only 8.22% for all of 1986.
“Technology stocks had been down for so long, they were one place for people with speculative money to make a play,” investment adviser Hirsch said.
Such also was the case with aggressive-growth funds, which tend to invest in stocks of smaller, less established companies, whose stocks have high potential for gains as well as losses. Capital-appreciation funds, one type of aggressive-growth fund, gained 22.52% in the quarter, thanks in part to sharp rises in the more speculative issues traded on the over-the-counter market. They had gained only 13.18% for all of 1986.
“But in a bad market, those funds are going to get hurt,” said Kurt Brouwer, a partner at Brouwer & Janachowski, a San Francisco investment advisory firm. He noted that in last year’s third quarter, when the S&P; 500 was down about 7%, aggressive-growth funds were off about 14%.
Gold funds also had been laggard performers. For most of last year, they did poorly, with a strong showing only in the third quarter boosting their overall gain to 36.07% for the year, Lipper said.
In the past quarter, however, they rose sharply even though gold prices gained only 3.2%. Funds investing in South African gold mines were buoyed in part by a sharp 52% rise in the value of South Africa’s financial rand, in which South African stocks are denominated.
Funds not investing in South Africa--including the quarter’s top performer, Van Eck Gold/Resources, which gained 64.76%--profited in part from worries about supply cutoffs from South African mines and concern about that nation’s racial strife.
Conversely, international funds, the stars of 1986 and 1985, posted only a below-average 15.2% gain for the first quarter. They had benefited from rising foreign stock prices and the falling dollar. But, except for the last part of March, the dollar was largely stable in the quarter.
Some old standbys continued to do well. Fidelity Magellan, by far the industry’s largest equity fund with more than $10 billion in assets, chalked up a 22.94% gain. The fund, with a diverse portfolio including risky as well as conservative stocks, has outperformned stock market indexes every year since 1976 except for 1984, analyst Mansueto said.
MUTUAL FUND PERFORMANCE (Appreciation plus reinvested income and capital gains) QUARTER ENDED MARCH 31, 1987 Top Performers Van Eck Gold/Resources +64.76% New England Zenith +64.74 Alliance Technology +61.26 Strategic Investments +60.78 U.S. Gold Shares +60.43 Financial Port-Gold +58.65 Franklin Gold Fund +58.10 U.S. New Prospector +58.02 U.S. Prospector Fund +55.56 Midas Gold Shr & Bullion +54.50 S&P; 500 (dividends reinvested) +21.35 All funds average +14.66 Worst Performers Equity Strategies -2.12% Industrial Govt -1.53 First Inv. U.S. Govt. Plus-I -1.40 Benham Target 2015 -1.26 MFS Lifetime Govt. -1.11 Maxim Bond -0.86 Benham Target 2005 -0.76 Seligman U.S. Govt. -0.31 Benham Target 2010 -0.28 Scudder Target U.S. Govt. 1990 -0.10 YEAR ENDED MARCH 31, 1987 Top Performers New England Zenith Cptl Growth +142.27% USAA Gold +119.70 Van Eck Gold/Resources +113.53 U.S. New Prospector +106.04 Financial Port-Gold +97.05 US Prospector Fund +96.49 IDS Precious Metals +93.56 Colonial Adv Str Gold +92.71 Vanguard Special Gold +90.23 Hutton Inv Sr-Prec Met +90.10 S&P; 500 (dividends reinvested) +26.21 All Funds Average +18.18 Worst Performers 88 Fund -26.70% American Heritage -16.07 Div/Grow-Laser Adv Tech -12.21 Bowser Growth -12.05 Fidelity Sel Life Ins. -7.47 Steadman Amer Industry -6.84 Fidelity Sel Electronic -6.60 Rochester Growth Fund -6.47 Industry Fund of America -5.60 ISI Income Fund -5.18 FIVE YEARS ENDED MARCH 31, 1987 Top Performers Merrill Lynch Pacific +445.35% Fidelity Magellan +380.82 BBK International +379.40 Loomis-Sayles Cap +374.41 Vanguard World-Inter Growth +354.83 Alliance Technology +348.30 Fidelity Sel Health +327.55 Putnam International Equities +323.67 New England Growth Fund +284.76 Vanguard Qual Dvd +284.41 S&P; 500 (dividends reinvested) +224.25 All Funds Average +165.65 Worst Performers 44 Wall Street -48.44% American Heritage -14.36 Industry Fund of America +0.50 Interstate Cap Growth +2.54 Steadman Amer Industry +3.26 Sherman, Dean Fund +5.98 First Inv Natural Resources +6.55 Steadman Oceanographic +14.94 American Inv Growth +20.00 Afuture Fund +47.83 GROUP PERFORMANCE (periods ended March 31, 1987)
Quarter Year Five Years Gold-Oriented Funds +49.40 +84.89 +149.88 Health Funds +26.56 +28.41 +245.88 Science & Technology Funds +26.39 +24.30 +165.50 Natural Resources Funds +25.58 +36.82 +101.00 Small Company Growth Funds +22.73 +12.87 +159.60 Capital Appreciation Funds +22.52 +20.32 +172.15 Growth Funds +20.20 +18.22 +171.49 Specialty Funds +20.00 +14.29 +207.37 Growth & Income Funds +16.00 +18.61 +184.77 International Funds +15.20 +42.58 +269.03 Global Funds +15.09 +28.25 +220.60 Option Growth Funds +13.89 +13.07 +126.25 Balanced Funds +11.77 +16.97 +185.35 Option Income Funds +11.06 +13.72 +106.02 Equity Income Funds +10.45 +14.26 +183.08 Income Funds +5.86 +11.14 +140.08 Utility Funds +3.50 +11.66 +173.60 Fixed-Income Funds +3.01 +9.08 +124.71 All Funds-Average +14.66 +18.18 +165.66 S&P; 500 (dividends reinvested) +21.35 +26.21 +224.25
Source: Lipper Analytical Securities
