FINANCIAL MARKETS : Mutual Funds Had Big Gains During Year : Investing: Equity funds averaged a 23.81% rise in ‘89, and even the worst performer beat the rate of inflation.

Mutual fund investing proved gratifying in 1989, with funds specializing in everything from gold to utilities posting double-digit returns. Even the worst-performing fund group beat the rate of inflation last year, according to Lipper Analytical Services, which surveys mutual fund performance.

During 1989, the average equity fund increased 23.81% in value. That’s not as much as investors could have earned by putting their money in funds that mirrored the Standard & Poor’s 500-stock index, which gained nearly 32% during the year. But mutual fund experts said the average investor is not complaining.

“How many people are going to complain about getting a 24% return?” asked Kurt Brouwer, president of Brouwer & Janachowski, a San Francisco-based investment advisory firm.

Lipper, which ranks mutual fund performance by industry group and individual funds, said it was difficult to lose by investing in mutual funds last year.

Whether investors put their money in funds specializing in growth stocks or in those with a global focus, they were likely to have earned more than 20%. That continues to pale in comparison to the S&P; 500, but industry experts said that’s partially due to caution on the part of investment managers.

Mutual fund managers keep part of their fund’s assets in cash to guard against market reversals, so when the market is bad, the funds tend to outperform the indexes. But when the market is good, they generally underperform.

Still, some industry group funds soared in value. Those lucky enough to have bet on health and biotechnology funds in 1989, for example, earned a staggering 43.5% on average. In other words, $100 placed in the average biotechnology/health fund in January, 1989, is worth $143.50 today.

The worst-performing fund group--World Income Funds--still beat the rate of inflation with a 6.02% return during 1989.

“It was really a pretty good year across the spectrum of mutual funds,” Brouwer added. “But the thing investors have to remember is these kinds of returns are not usual. They are very unusual. In 1990, we could see returns ranging between zero and 10%.”

On average, biotechnology funds performed the best during the year, buoyed by a surge of new medicines awaiting regulatory approvals and increased earnings at some health-care concerns, said A. Michael Lipper, president of Lipper Analytical.

But natural resources funds, which typically invest in oil and gas stocks, and utility funds were also hot, posting 32.13% and 28.96% returns, respectively.

During the final quarter of 1989, however, investors did best by putting their money into gold. The average gold fund appreciated 12.37% during the quarter, nearly double the second-best quarterly performance recorded by utility funds, which gained 6.72%.

That year-end gold rally helped make Edmund Serfaty a mini-celebrity. Serfaty is vice president and portfolio manager for the United Services Gold Fund, which was the second-best performing individual mutual fund during 1989, according to Lipper.

During 1989, the US Gold Shares fund jumped 64.73% in value--far outperforming the S&P; 500 and vindicating Serfaty’s premise that gold was due for a upturn.

But the best performing mutual in 1989 was the Alger Small Capital fund, which invests in small but fast-growing firms. Alger’s investors earned 65.08% last year.

And Fred Alger, chairman of Fred Alger Management Inc., believes that small growth stocks will do even better in 1990. “Instead of looking for undervalued companies, I think the market will begin searching out really good companies that are showing earnings growth,” he said. “There is a scarcity value to these companies, so we believe their values will be bid up.”

Alger won’t say whether he expects his fund to rank first again in 1990, but he adds, “I think we’ll be a contender.”

Over a five-year period, the funds that did the best were those investing internationally. These benefited from the prospect of reduced trade restrictions in Europe and reduced tensions in Eastern Europe.

Fund managers are also optimistic about this group for the long term, believing that as Eastern Bloc countries turn to capitalistic reforms, new markets will open up and trade possibilities will widen.

Yet, for all the good news, there was also a bit of bad news for people who invest for the short haul and those who relied on the wrong fund managers.

The average investor who waited to pour money into mutual funds until the last quarter of 1989 would have found their fund values declining if they were invested in capital appreciation funds, small company growth funds, convertible securities funds or those specializing in bank and thrift stocks.

Moreover, fund managers made a huge difference over both the short and the long term.

A $100 investment put in the American Heritage Fund in 1984 is now worth only $51.52. And the same amount placed in the 44 Wall Street Fund five years ago is now worth $55.19.

If investors put $100 in the Strategic Gold and Minerals Fund in 1989, they’d start 1990 $17.75 poorer.

Poor fund performances are blamed on a variety of factors, including short-term market glitches. But if a fund has a negative performance for several years in a row, it may be time to switch funds, said Joe Mansueto, president of Morningstar Inc., a Chicago firm that tracks mutual fund performance.

MUTUAL FUND PERFORMANCE (Appreciation plus reinvested income and capital gains, listed in percent) QUARTER ENDED DEC. 30, 1989 Top Perfomers Strategic Investments: 32.33% US Gold Shares: 29.90 International Investors: 24.60 Franklin Gold Fund: 18.98 Benham Gold Equity Index: 17.72 Lexington Gold Fund: 17.07 Fidelity Select Energy: 16.41 Vanguard Special: Gold: 15.95 Fidelity Select Precious Metals: 15.54 Oppenheimer Gold & Spec Mins: 14.12S&P; 500 (dividends reinvested): 2.06 All equity funds average: +0.09% Worst Performers Fidelity Select S&L;: -22.92% Pilgrim Preferred: -14.95 Steadman Oceanographic: -14.87 Nat’l Aviation & Technology: -14.62 Prudent Speculator:Leveraged: -13.84 Prudent Speculator:Large Cap: -13.83 Fidelity Select Financial: -12.96 Ostrander Fixed: Hi Inc Res: -12.69 Calvert Fund: Washington Area: -11.86 Insider Reports: -11.65 YEAR ENDED DEC. 30, 1989 Top Performers Alger Small Capital: 65.08% US Gold Shares: 64.73 Strategic Investments: 61.21 Gt Global Growth: Japan: 60.73 Financial Portfolio: Health: 59.72 Fidelity Select Energy: 59.44 Fideltiy Select Medical: 58.02 Vista Funds: Growth and Income: 56.85 Gt Global Growth: America: 54.77 American Telecom:Income: 52.22 S&P; 500 (dividends reinvested): 31.64 All equity funds average: 23.81 Worst Performers Strategic Gold/Minerals: -17.75% Pilgrim Preferred: -14.12 Dean Witter High Yield: -13.64 Alliance Bond: High Yield: -12.94 American Investment Income: -12.33 Amerian Capital High Yield: -12.04 National Bond: -12.00 Ostrander Fixed: Hi Inc Res: -10.36 Schield Portfolio High Yld: -8.66 VanKamp Merr: High Yield: -8.52 FIVE YEARS ENDED DEC. 30, 1989 Top Performers New England Zenith Cap Gro: 497.61 Fidelity Overseas: 353.21 Merrill Pacific A: 328.87 Japan Fund: 314.44 Trustees Commingled Int’l: 291.90 Alliance International: 285.43 Vanguard World: Int’l Growth: 285.22 Kleinwort Benson: Int’l Equity: 282.49 Gam International: 278.01 T. Rowe Price Int’l Stock: 268.97 S&P; 500 (dividends reinvested): 152.55 All equity funds average: 116.95% Worst Performers American Heritage Fund: -48.48 44 Wall Street Fund: -44.81 Strategic Gold/Minerals -43.28 Dividend/Growth: Growth Series: -38.53 Steadman Oceanographic: -32.94 Steadman American Industry -17.91 Strategic Silver -10.32 Steadman Investment: -2.68 Fidelity Select Technology: -0.14 Quantum Fund: -0.08 GROUP PERFORMANCE (periods ended DEC. 30, 1989 )

Quarter Year Five Years Gold Oriented Funds +12.37% +22.47% +78.63% Utility Funds +6.72 +28.96 +122.23 Natural Resources Funds +6.62 +32.13 +118.74 International Funds +4.50 +22.25 +245.24 Health/Biotechnology Funds +4.36 +43.50 +202.81 World Income Funds +3.80 +6.02 +135.60 Global Funds +3.16 +21.70 +161.87 Income Funds +2.67 +18.88 +100.62 Fixed Income Funds +1.69 +9.42 +60.82 Balanced Funds +1.46 +19.46 +102.13 Global Flexible Portfolio Funds +1.07 +18.31 +94.13 Mixed Income Funds +0.99 +13.84 +70.29 Flexible Portfolio Funds +0.16 +17.10 +71.71 Equity Income Funds +0.12 +21.36 +98.80 Growth & Income Funds -0.11 +23.18 +117.35 Option Income Funds -1.21 +12.45 +82.78 Growth Funds -1.23 +25.44 +111.53 Science & Technology Funds -1.30 +22.06 +88.31 Convertible Securities Funds -1.69 +13.84 +85.30 Capital Appreciation Funds -2.18 +23.81 +107.10 Specialty/Miscellaneous Funds -2.54 +23.64 +107.91 Small Company Growth Funds -2.96 +22.95 +95.92 S&P; 500 (dividends reinvested) +2.06 +31.64 +152.55 All equity funds average +0.09 +23.81 +116.95

Source: Lipper Analytical Services