Jitters Help Make Gold Mutual Funds Top Performers in Third Quarter

Gold glittered for mutual fund investors in the third quarter as fears of renewed inflation and turmoil in the Middle East made funds investing in gold mining stocks the overwhelming winners among fund groups in the period.

All types of stock funds generally performed well in the quarter, gaining 5.68%, compared to a 1.93% rise in the second quarter, according to data released Friday by Lipper Analytical Securities, a New York firm that tracks fund performance.

However, stock funds again underperformed the Dow Jones index of industrial stocks and Standard & Poor’s 500-stock index, as they have for most of the current 5-year-old bull market.

And funds investing in bonds and other fixed-income securities--which far outsell stock funds--had a quarter that they would just as soon forget. Rising interest rates and declining bond prices pushed these funds to a loss in the quarter, adding to a 1.92% loss in the second quarter, Lipper Analytical said. (The exact amount of the third-quarter loss won’t be released until Monday, Lipper Analytical said.)

The results “contain some warning signs,” said A. Michael Lipper, president of Lipper Analytical. The leadership of gold funds may be seen as disturbing to stock market investors “since gold is often viewed as a safety reserve in periods of unstable (stock) values,” he said.

Posted Hefty Gain

Gold funds clearly were the shining stars, posting a 19.42% gain in the three months ended Sept. 30, far ahead of the 9.41% gain enjoyed by the second-place group, international funds, which invest in foreign stocks. In third place with a 7.69% gain were global funds, which invest in U.S. and foreign stocks. Nine of the top 10 individual funds were gold funds.

The performance by gold funds was a reversal of their lackluster performance in the second quarter, when they fell 2.1%. But it was a return to their prominence in the first quarter, when they led all fund groups with a 49.4% gain.

The gain by gold funds far exceeded rises in the price of the metal itself. Investors tend to buy stocks of gold mining firms in anticipation of future rises in the price of gold, in part because “rises in gold prices expand the profit margins and potentials for greater earnings in these companies,” said George S. Bissell, chairman of Boston-based Keystone Precious Metals Holdings, the quarter’s top-performing fund.

Keystone outperformed other gold funds in part because it increased its holdings in Australian mining stocks, which performed relatively well in the quarter, Bissell said.

The rise and fall and rise of gold funds illustrates the dangers of investing in funds solely on the basis of performance for any given quarter, experts said Friday.

Gold funds are “either at the top or at the bottom,” said Joe Mansueto, president of Morningstar Inc., a Chicago firm that tracks fund performance. The 81.61% gain for gold funds in the past year is “unsustainable,” he contended.

Dollar Bottoming Out

Some experts also questioned whether international funds can sustain their strong performance in the third quarter and the past two years. The funds have benefited from booming overseas equity markets and the falling dollar, which boosts the value of foreign currencies, in turn aiding foreign equities.

“But the dollar is in a bottoming-out process,” and thus international funds may not be able to repeat their recent strong gains, said Sheldon Jacobs, editor and publisher of No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y.

The latest results also illustrate how funds making the top 10 list in one quarter often fall to among the worst performers in the following quarter. That is because the top-performing funds usually take high investment risks or are highly concentrated in only a few stocks, making them far more volatile than the most diversified funds.

Such was the case with the Sherman, Dean Fund. It plummeted 14.14% in the third quarter, ranking second-worst among equity funds after ranking as the second-best in the previous quarter with a gain of 31.94%. About two-thirds of its assets have been invested in just one stock, that of Benguet, a Philippines mining concern.

All told, the 5.68% gain for all equity funds in the quarter compared to an 8.09% gain for the Dow Jones industrial index and a 6.6% gain for the S&P; 500, the latter two with dividends reinvested.

Biggest Performed Well

Fund tracker Mansueto said the underperformance was not out of line, considering that funds are not fully invested at any given time and must make available a certain amount of cash for redemptions to fund shareholders.

Funds also tend to have a more diversified portfolio than the stocks in the Dow industrial index. As long as the market is led by the blue chip stocks of the Dow index, “funds are going to underperform the market,” Lipper said.

Most of the nation’s 10 largest funds performed well in the quarter, led by funds investing heavily in the large-capitalization stocks of the Dow and S&P; 500.

The top performing fund among the 10 largest, Pioneer II, posted an 8.71% gain for the quarter, thanks to its portfolio of large-capitalization stocks, Mansueto said.

The single largest fund, Fidelity Magellan, posted a respectable 6.05% gain. Its diversified portfolio includes large- and small-capitalization stocks.

The Windsor fund lagged the 10-largest group with a meager 0.18% gain, due largely to its high cash position and its portfolio of large-bank stocks, which slumped during the quarter, Mansueto said.

But although funds investing in small-company stocks lagged the market, they could turn around soon and might be good buys, some experts said.

“Small capitalization stocks are going to have their day before this bull market ends,” newsletter editor Jacobs said. Those funds, he said, “shouldn’t be neglected.”

MUTUAL FUND PERFORMANCE Data is for equity funds only; data on income funds will be available in Tuesday’s editions. Figures include appreciation plus reinvested income and capital gains.

QUARTER ENDED SEPT. 30, 1987 Top Performers

Keystone Precious Metals +26.49% GT Japan Growth +25.39 IDS Precious Metals +24.50 USAA Gold +23.79 Shearson Lehman Precious Metal +23.62 Franklin Gold Fund +23.58 Van Eck Gold/Resources +23.30 Midas Gold Shares & Bullion +22.93 United Gold & Government +22.53 Fidelity Select American Gold +22.35 S&P; 500 (dividends reinvested) +6.60 All Equity Funds Average +5.68

Worst Performers

44 Wall Street -19.95% Sherman, Dean Fund -14.14 Westergaard Fund -8.72 44 Wall Street Equity -8.60 Kaufmann Fund -8.40 Bruce Fund -6.66 ABT Emerging Growth -6.56 Fidelity Select Energy Serv -4.75 Fidelity Real Estate -4.67 IDS Strategy-Aggressive Equity -3.30

GROUP PERFORMANCE (periods ended Sept. 30, 1987)

Quarter Year Five Years Gold-Oriented Funds +19.42% +81.61% +123.86% International Funds +9.41 +45.68 +340.81 Global Funds +7.69 +37.36 +260.69 Science & Technology Funds +7.57 +46.13 +156.74 Natural Resources Funds +5.83 +43.03 +121.27 Growth Funds +5.59 +33.49 +163.21 Capital Appreciation Funds +5.26 +34.11 +162.59 Growth & Income Funds +4.68 +29.54 +176.23 Specialty Funds +4.45 +26.82 +210.61 Small Company Growth Funds +3.67 +28.59 +153.69 Option Income Funds +3.67 +24.13 +106.92 Option Growth Funds +3.64 +29.48 +118.33 Health Funds +3.27 +36.55 +180.58 Equity Income Funds +3.20 +17.83 +156.83 Utility Funds -0.04 +2.16 +139.20 All equity funds average +5.68 +33.63 +170.17 S&P; 500 (dividends reinvested) +6.60 +43.42 +227.35

Source: Lipper Analytical Securities

PERFORMANCE OF THE 10 LARGEST FUNDS

Third quarter, through Sept. 29)

Fund Total return Pioneer II +8.71% Templeton World +8.25 American Capital Pace +7.17 Investment Co. of America +7.07 Fidelity Magellan +6.05 Affiliated Fund +5.44 Fidelity Equity Income +3.38 Merrill Lynch Retirement +3.04 Fidelity Puritan +2.68 Windsor +0.18

Source: Morningstar Inc.