Stock Mutuals Back in Black, but Future Cloudy

Stock mutual funds began to make money again in the third quarter after a dismal first half of 1992.

But fund shareholders shouldn’t be too quick to celebrate: The third-quarter results paint a picture of an industry still struggling to cope with shifting market trends.

Of 956 general stock funds tracked by New York-based Lipper Analytical Services Inc., the average gain in the quarter ended Sept. 30 was 2.77%.

That followed declines of 0.16% in the first quarter and 2.58% in the second quarter, on average.

For the year to date, the typical stock fund shows a minuscule gain of 0.04%--basically, dead money.

While the uninspired performance numbers this year reflect an uncertain stock market trading in a narrow range, they also mask major trends in the market and among the funds themselves:

* Investors are showing a clear preference for dividend income. In an environment of low interest rates and slow economic growth, investors have been hungry for stocks that pay big dividends--so that, even if the stocks don’t appreciate, some decent payoff is guaranteed.

Hence, utility funds performed best of all stock fund categories in the third quarter, gaining 4.94% on average. Second best: Natural resources funds, up 3.93%, thanks in part to high dividends on many oil and natural gas stocks.

Those energy dividends are looking even better, experts note, because strong oil and gas prices suggest that the industry could reward shareholders with bigger dividend increases in 1993.

Overall, the desire for dividend income is a significant turn by investors, fund experts note, and many believe that it will continue: Many of the investors who are entering the stock market now are ex-bank savings certificate holders who are clearly yield-oriented.

* Growth-stock investing has become a much tougher game. There are more growth-stock funds than any other category--342, by Lipper’s count. Investors became enamored of growth-stock investing in the 1980s because the designation itself seemed to say it all: Every fund investor wants his or her money to grow, and preferably in a hurry.

That was the promise of growth-stock funds--to seek out the fastest-growing companies.

But this year, the most promising growth stocks of the ‘80s--companies in consumer businesses such as food, health care and retailing--have turned into duds. Wall Street is beginning to recognize that the consumer binge is waning, and with it the profit growth of many company stars of the ‘80s.

The problem for growth-fund managers is that many have been reluctant to abandon their old favorites. One painful result: Fund performance overall is lagging the broad market indexes. While the average stock fund gained 2.77% in the third quarter, the benchmark Standard & Poor’s 500-stock index was up 3.15%, Lipper reports.

And for the year to date, the average growth stock fund is down 1.22%, while the S&P; 500 index is up 2.46%.

Though many growth funds turn up in the list of the quarter’s best performers, most of those leaders aren’t true growth funds. Rather, they are funds that concentrate on so-called value stocks: Companies whose shares sell for reasonable prices compared to earnings and the worth of the firms’ assets.

Essentially, value-fund managers too are hunting for growth, but they are generally unwilling to pay the high prices for stocks that traditional growth managers are willing to shell out in the name of super-fast growth.

The Chicago-based Oakmark Fund, for example, gained 10.31% in the third quarter. But while Oakmark is classified as a growth fund, portfolio manager Robert Sanborn says his big hits in the quarter were stocks that traditional growth managers would never bother with: Conservative insurance companies, such as Horace Mann Educators.

Stephen Johnes, manager of the Merrill Lynch Growth Funds for Investment and Retirement, the quarter’s second- and third-best funds (they’re basically the same portfolio), notes that fund managers face a much greater challenge picking stocks in a slow economy because there is vastly less room for error by managers of would-be growth companies.

“When you can’t count on inflation to give you better prices, and you can’t count on the economy to give you (sales) growth, then you have to count on either market share gains or on providing your customer with some advantage” to set your product or service apart, Johnes says.

He scored in the third quarter with such technology stocks as Applied Materials (semiconductor equipment) and Autodesk (software)--both of which provide customers with “advantaged” products, Johnes says.

But relatively few companies can make that leap, he notes, so finding those firms presents a far more difficult challenge to growth-fund managers, Johnes says.

Where does that leave stock fund investors? First, if your entire fund bet is on growth funds, you ought to be channeling at least some money into value-oriented funds and funds that look for dividend income as well as stock appreciation.

Second, you’ll have to be much more vigilant about your funds’ performance: If, three years into the ‘90s, your funds are consistently lagging the market, it may be time to find managers who understand how to make money in this new environment.

Top Funds, 3rd Quarter

Fund Return MetLife/S.S. Energy +13.80% Merrill Growth I&R;/A +13.19% Merrill Growth I&R;/B +12.90% Fidelity Sel. Energy Svcs. +12.83% Twentieth Cent. Giftrust +10.73% Financial Emerg. Growth +10.50% Century Shares Trust +10.38% Oakmark Fund +10.31% Financial Energy +10.22% Fidelity Sel. Electronic +10.21% General stock fund avg. +2.77%

Source: Lipper Analytical Services Inc.