Top Funds Got Ahead by Staying Put

For the winningest stock mutual funds of 1991--and stock fund investors generally--the secret to making big money was just staying put.

Case in point: Mark Seferovich, manager of the United New Concepts fund, says his portfolio’s 88.3% gain for the year was “an ode to not trying to outsmart yourself.”

Rather than trade in and out of the market excessively, Seferovich says he stuck with the companies whose long-term growth potential continued to look good. The result was the eighth-best performance of 1,233 stock funds tracked by Lipper Analytical Services.

Even those fund investors who had to settle for average gains last year could hardly complain. If they stayed in the game the entire year, they made money with amazing consistency:

* The average general stock fund soared 17.2% in the first quarter, slipped 0.9% in the second, jumped 7.3% in the third and closed with an 8.3% fourth-quarter gain.

* The final tally for all of 1991: A 35.6% return for the average fund, the best annual performance since a 36.8% rise in 1967, according to Lipper.

Small-company funds and growth-stock funds in general were the year’s stars, while those specializing in gold issues, natural resources and foreign stocks (European in particular) lagged badly.

The funds’ strong overall showing seemed to justify investors’ continuing faith in the mutual fund concept as the easiest way to play the stock market.

But most fund managers, including 1991’s leaders, admit that 1992 will be a much tougher test of their stock-picking prowess. Stock prices already have built in enormous expectations for the economy and corporate profits in 1992 and beyond, the pros say.

“I’m certainly not making any promises about 1992,” says Michael Gordon, whose Boston-based Fidelity Select Biotechnology stock fund soared 99.1% last year, on top of a 44.4% rise in 1990.

Here’s a look at some of the top fund managers of 1991, how they earned their big returns and how they’re positioned for 1992:

* Fidelity’s Gordon: His fund, the third-biggest gainer last year after ranking No. 1 in 1990, has ridden Wall Street’s explosive love affair with biotech stocks, which began in 1989. Last year alone the fund’s assets rocketed from $225 million to $1.15 billion.

Now, many analysts argue that biotech stocks have become ridiculously overpriced. The mini-crash in the stocks last November was just a prelude, the bears say.

Because Gordon’s fund exists specifically to invest in biotech, he can’t simply walk away from the stocks. But he can tilt the portfolio toward issues perceived less risky.

“I’m just trying to invest in the companies with the best products and the best earnings potential,” he says. There’s no arguing that many of the stocks appear to be overpriced given that the companies are still in the research phase, Gordon says, but “the question you have to ask is: What are they going to look like when their drugs are approved?”

Of 150 stocks in the portfolio, his favorites remain Thousand Oaks-based Amgen, San Diego-based Gensia Pharmaceuticals, Chiron Corp. and Synergen Inc.

* United New Concepts’ Seferovich: Most of his top stocks of 1991 were “fast balls right down the middle of the plate,” Seferovich says--meaning, they were good companies with straightforward stories that didn’t require a lot of mental gymnastics.

Minnetonka, Minn.-based health-maintenance firm United HealthCare was one big winner, soaring from $23.25 to $74.50 for the year. Likewise, Seferovich stayed with medical-instrument maker SciMed Life Systems even after the stock plunged from $93 to $57 last fall on patent concerns.

SciMed has since rebounded to $90.50, confirming Seferovich’s belief that the patent worries were largely overblown.

In 1992, he says he’ll follow the same formula that worked in 1991, which is to stick with solid growth companies in his $140-million fund. He also may buy more new stock issues than he has in the past, he says. Despite perennial concerns that new issues are high-risk stocks, Seferovich says he increasingly sees “experienced people with good concepts” bringing their companies public.

“I think the best thing any money manager can do in 1992 is to keep an open mind,” he says.

* Ken Heebner, CGM Capital Development Fund: Like Seferovich, veteran money manager Heebner earned his stripes in 1991 by holding on to his winners. The result was a 99.1% gain, making CGM the No. 2 fund for the year.

Boston-based Heebner has 10% of the $323-million fund in shares of tobacco and food giant Philip Morris, which climbed from $51.75 to $80.25 last year. CGM also is heavily invested in drug stocks such as Merck and Pfizer, and in some Midwest savings and loan firms.

Heebner says his stock return expectations for 1992 are “modest.” He plans to stay with many of his growth-stock winners, but his favorite investment now is the 30-year Treasury bond. Heebner expects long-term interest rates to continue falling this year in a weak economy. If he’s right, the 30-year T-bond will soar in value.

Though the CGM Capital Development fund is closed to new investors, Heebner also manages a companion fund, the CGM Mutual Fund, which accepts new money. That fund, which rose 41% last year, owns many of the same stocks as its sister fund, including Merck, mortgage banker Countrywide Credit and TelMex, the Mexican phone company. CGM Mutual also is Heebner’s biggest bet on 30-year T-bonds: 40% of the fund is invested in the bonds.

* John Ballen, MFS Lifetime Emerging Growth Fund: Ballen may be alone among the ranks of last year’s top fund managers in that he played more than just the growth-stock game.

Growth stocks are those companies expected to do consistently well in a good economy or bad. Their rivals for Wall Street’s attention are the “cyclical” companies whose businesses zoom at the outset of an economic recovery, as consumers and businesses start spending in earnest again.

Ballen’s $190-million fund owned its share of growth stocks last year, which helped power the Boston-based fund to an 87.6% gain, ninth-best overall. Health-care issues were his stars, as they were for most of ‘91’s top funds.

But Ballen says he also began last year to “layer in” some economy-sensitive stocks that he figured would soar whenever the recession ended for good. And he says he’ll continue to shift the portfolio that way in 1992 even though the economy’s recovery remains uncertain. The recession will end eventually, he says, and by then it’ll be too late to buy the cyclical stocks--they will already have rocketed.

Some of the cyclical industries where Ballen has been shopping for stocks include pollution control (he owns Mid-American Waste Systems) and computer software (Autodesk and Mentor Graphics are two favorites).

How to Judge Your Fund: Did your stock fund perform at least as well as the average fund last year? Here’s how to tell:

* Sometime in the next month or so, you should receive an annual report from your fund. In it, the fund will show its “total return” for the year--the percentage return earned from the appreciation of the stocks in the portfolio, plus any dividend income.

* Compare that total return to the average for funds in the same category, as listed in the accompanying table. If you aren’t sure how your fund is categorized--for example, “growth,” “capital appreciation,” etc.--call the fund and ask. Specifically, you should tell the fund representative that you want to know how the fund is categorized by the Lipper rankings, which are provided by Lipper Analytical Services of New York.

If the rep can’t tell you, ask that someone call back.

* Don’t overreact if your fund performed below average last year. The more important question is the fund’s longer-term track record--say, over the last three to five years. If your returns have lagged for that long, however, you may be right to consider shifting to a better fund. “Staying put” is a winning investing concept as far as it goes, but nobody should hold a dog forever.

Stock Fund Performance in 1991

Here are average returns for 18 categories of stock mutual funds in 1991, as well as an overall fund average. Also listed are fourth-quarter returns, and five-year performance through Dec. 31.

Average total return: Fund category (no. of funds) 4th Qtr. Year 5 years Health/biotech (10) +16.4% +74.3% +238.3% Financial services (11) +10.5% +60.6% +78.2% Small company (114) +10.3% +51.6% +94.1% Science/technology (21) +12.7% +45.4% +90.2% Capital appreciation (135) +9.0% +38.8% +87.3% Growth (299) +8.8% +36.0% +89.1% Real estate (6) +7.4% +33.1% +47.3% Specialty/miscellaneous (30) +7.1% +32.3% +76.9% Growth and income (248) +7.2% +28.9% +78.6% Equity income (71) +5.9% +26.6% +63.8% Utilities (26) +1.6% +21.4% +64.5% Global (56) +4.2% +19.5% +60.5% Pacific region (21) +0.4% +14.1% +78.3% International (88) +1.6% +12.3% +50.8% Environmental (6) -1.5% +8.3% NA European region (28) +0.6% +5.6% +46.1% Natural resources (21) -2.9% +3.7% +53.5% Gold-oriented (36) +2.3% -4.5% +6.7% Average general stock fund (867) +8.3% +35.6% +84.8% S&P; 500 stock index +8.4% +30.4% +104.5%

NA -- not available (fund category didn’t exist for entire period)

Source: Lipper Analytical Services Inc.

Top Funds, 4th Quarter

Fund Return 20th Century Vista +22.9% Alliance Technology +22.8% 20th Century Growth +22.2% Special Port.: Stock +21.7% 20th Century Giftrust +21.6% Hartwell Growth +21.6% AMEV Growth +21.5% MFS Lifetime Emerging +21.5% MIM Stock Apprec. +21.2% MFS Emerging Growth +21.1%

Source: Lipper Analytical Services

Top Funds, Full-Year ’91

Fund Return Oppenheimer Biotech +121.1% CGM Capital Develop. +99.1% Fidelity Select Biotech +99.1% Montgomery Small Cap +98.8% American Heritage +96.6% Financial Funds: Health +91.8% Berger One Hundred +88.8% United New Concepts +88.3% MFS Lifetime Emerging +87.6% Oberweis Emerging Gro. +87.1%

Source: Lipper Analytical Services