For Most Investors, Another Decent Gain : Review: Portfolios owning U.S. stocks climb 5.30% in the quarter on average; the year-to-date gain is now 10%.

By TOM PETRUNO

Oct. 5, 1993 12 AM PT

TIMES STAFF WRITER

For the fifth straight quarter, stock mutual fund investors were rewarded well for ignoring the bears and sticking with the bulls.

The average U.S. general stock fund posted a total return of 5.30% in the quarter ended Sept. 30, bringing the year-to-date return to a tidy 10%, according to fund tracker Lipper Analytical Services in Summit, N.J.

Helped by the continuing strong performance of funds that own smaller stocks, the general stock fund return was more than double the 2.58% total return on the blue-chip Standard & Poor’s 500 stock index in the quarter.

Meanwhile, investors in international stock funds reaped significantly larger returns for a third consecutive quarter.

The summer’s stock fund gains were pretty well shared across all categories of domestic specialty funds as well--from utility funds to real estate funds and even to the downtrodden health care funds.

In fact, of 22 categories of stock funds tracked by Lipper, only two posted negative returns for the quarter: Canadian stock funds and gold stock funds.

For the year to date, only the health care category is down, a victim of the ongoing national debate about overhauling the U.S. health insurance system.

But for the millions of fund investors--and for their portfolio managers--the global stock markets’ lengthy bull run has become as much a source of worry as a cause for celebration.

After five straight quarters of rising returns for the typical U.S. stock fund and nearly three years without a significant market decline, history suggests that the odds of a meaningful pullback have risen exponentially, experts say.

“We’re due,” said Michael Lipper, head of Lipper Analytical. A normal market correction could be expected to shave 10% off stock prices, he pointed out.

John Bogle, head of the giant Vanguard Group of mutual funds in Valley Forge, Pa., is reportedly so concerned about the risk in stock funds today that he is suggesting that conservative Vanguard investors cut back their stock fund weightings by as much as 15% and shift that portion to money market funds. Bogle is expected to advise as much in a letter to Vanguard shareholders this month.

Of course, many individual investors by now know the litany of reasons the stock market is ripe for trouble: Stock prices relative to corporate earnings are near historical highs, dividend yields are near historical lows, the economy is sluggish, and there’s a frenzy for new-stock issues and other investments that typically turn hot at market peaks.

The problem, said Don Phillips, publisher of the Morningstar Mutual Funds newsletter in Chicago, is that “all of those things that are true today also were true three quarters ago.” Yet they haven’t stopped the advance of stock prices worldwide.

Phillips suggests that the slow pace of the U.S. market’s rise over the last five quarters is one big reason that this bull run may be more sustainable than the bears would like to believe.

“The tone of the market has been anything but giddy,” he said.

Indeed, most of the stellar gains this year have been in narrow “sector” funds, and overseas. In contrast, the average gain among the 444 U.S. growth stock funds is 8% year-to-date, nearly two-thirds of which occurred in the third quarter.

That 8% rise is a respectable figure, but it hardly constitutes what most market veterans would consider rampant speculation.

Almost everyone on Wall Street agrees on what could suddenly turn the stock fund party into a wake, at least temporarily: a rise in interest rates.

However, as the economy creeps along, the chance of a dramatic rise in rates seems remote, most experts say. And until rates rise, individual investors may see little point in abandoning stocks outright.

At the same time, the heavy, automatic flow of cash into stock funds from retirement accounts (such as 401(k) plans) gives many portfolio managers a constant source of money that must be put to work. That may provide a stronger source of upward pressure on stock prices than Wall Street may yet understand, some experts say.

Finally, while market pros debate the fundamentals and crane their necks looking for trouble, individual investors may have another thought, said Sheldon Jacobs, editor of the No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y.

“Calling a market top is one of the most difficult things in the world,” he said. He believes many individual investors have decided it’s not worth trying. At least for now, he said, they have convinced themselves that they truly are long-term investors.

Stock Funds: A Good Year Gets Better

Most categories of stock mutual funds have posted strong returns so far this year. 9-month average gains by fund category Gold: +43.7% Japanese: +42.9% Natural resources: +25.4% International: +25.1% Small company: +13.7% General fund avg.: +10.0% Growth & income: +8.8% Growth: +8.0% S&P; 500 index: +7.6% Source: Lipper Analytical Services

Third-Quarter Stock Fund Roundup

Here are average total returns for 22 categories of stock mutual funds ranked by third-quarter returns. A fund’s total return includes dividends, plus or minus the net change in price. Compare your funds’ returns for the quarter and first nine months to the averages in their respective categories. Unsure how your funds performed? Call each fund directly and ask. Also ask how the fund is categorized in the Lipper Analytical ratings, so you have the proper benchmark.

Category (No. of funds) 3rd qtr. Yr. to date Latin American (8) +12.88% +21.57% Science and technology (23) +10.16 +23.31 Real estate (7) +9.96 +24.26 Global small company (15) +9.58 +26.67 Pacific region (33) +9.56 +32.72 Financial services (14) +9.42 +20.52 International: foreign stocks only (143) +9.35 +25.06 Small-company growth (193) +8.51 +13.72 European region (31) +8.13 +16.80 Global: U.S. and foreign stocks (78) +8.09 +19.11 Capital appreciation (148) +6.67 +12.60 Japanese (7) +6.63 +42.92 Specialty/miscellaneous (27) +5.71 +17.58 Growth (444) +5.01 +8.04 Utilities (56) +4.77 +16.10 Equity income (88) +4.36 +12.08 Growth and income (328) +3.43 +8.83 Environmental (10) +2.86 +0.19 Health/biotechnology (16) +2.84 -5.28 Natural resources (25) +2.80 +25.42 Canadian (3) -3.92 +23.62 Gold (32) -9.63 +43.68 General stock fund average (1,201) +5.30 +10.00 S&P; 500 index, including dividends +2.58 +7.57

Category (No. of funds) 12 months Latin American (8) +35.40% Science and technology (23) +45.04 Real estate (7) +34.07 Global small company (15) +35.60 Pacific region (33) +36.25 Financial services (14) +39.66 International: foreign stocks only (143) +24.08 Small-company growth (193) +31.74 European region (31) +12.64 Global: U.S. and foreign stocks (78) +22.17 Capital appreciation (148) +24.59 Japanese (7) +38.60 Specialty/miscellaneous (27) +27.13 Growth (444) +17.96 Utilities (56) +19.53 Equity income (88) +17.28 Growth and income (328) +15.49 Environmental (10) +7.64 Health/biotechnology (16) +4.69 Natural resources (25) +20.95 Canadian (3) +25.04 Gold (32) +30.23 General stock fund average (1,201) +20.13 S&P; 500 index, including dividends +12.97

Source: Lipper Analytical Services Inc.

Top Funds, 3rd Quarter

Fund Return Progressive Aggr. Growth +26.65% Ivy Emerging Growth +21.45% Smith Barney Sp. Eqty. A +20.50% Smith Barney Sp. Eqty. B +20.29% INVESCO Strat. Leisure +19.80% GAM Global +19.39% Fidelity Sel. Home Fin. +19.19% Twentieth Cent. Giftrust +19.05% PBHG Growth Fund +18.89% Capitol Funds Sp. Eq. A +18.70% Average stock fund +5.30%