A Few Non-Fattening Reasons to Give Thanks

Most people who own mutual funds have several reasons to count their blessings--and not just because the financial markets have been cooperating in 1993.

It’s true that this has been a good year for making money, with 97% of all stock and bond funds in the plus column through Oct. 31. Such impressive performance shows there is something to the old saying that a rising tide lifts all boats, or at least the vast majority.

But there have also been some other, more subtle trends and developments in 1993 for which fund shareholders should be grateful. Here’s a short list for investors wanting to give thanks:

* Better disclosure. New guidelines this year from the Securities and Exchange Commission are forcing mutual funds to provide more pertinent information to shareholders in the prospectus, the key disclosure document.

Among other things, fund companies now must identify the portfolio manager, provide background information on that person, alert shareholders to any management changes, include a comparative performance chart and provide a written assessment of the investment results.

A few firms, notably Gateway Trust in Milford, Ohio, went a step further in 1993 with prospectuses that provide much more information than required, in an easy-to-read format.

* No major scandals. The tough regulations with which mutual funds must comply greatly reduce the danger that shareholders might fall victim to embezzlement or other types of foul play.

These safeguards aren’t perfect, of course. Just last month, for instance, Kemper Financial Services agreed to pay $9.75 million to shareholders in two option-income funds to settle a class-action lawsuit. The former portfolio manager was accused of diverting some profitable trades away from the funds and into a company retirement plan during 1987.

But for the most part, problems such as this are rare--an impressive achievement considering the rapid growth of mutual funds over the past decade.

* Stable if not lower expense ratios. In general, the operating charges that fund companies pass along to shareholders for management, administrative and certain marketing costs appear to have peaked for most fund categories between 1988 and 1991, according to data provided by Morningstar Inc. of Chicago.

Though expenses for many funds are still high, the trend now seems to be toward modestly lower costs, indicating that some economies of scale are kicking in.

Also of note, upfront sales charges or loads--which are not counted as part of the expense ratio--continue to drop, and several fund companies have started to waive annual fees on individual retirement accounts.

* Lower 12b-1 fees. One of the more important regulatory changes in 1993 was a new rule capping the 12b-1 and related service fees a fund can charge at 1% a year, down from 1.25%.

These costs are typically used to compensate commissioned salespeople on load funds that don’t have large front-end sales charges.

The new rule also tightens the legal definition of no-loads to exclude those levying more than 0.25% annually in 12b-1 fees.

* Emergence of discount brokerages. Another notable cost trend of late has been the ability to buy a growing number of no-load funds--sans any additional markups--through selected discount brokerages.

Previously, you had to pay a transaction fee on no-load trades placed through a discounter. The new programs make it easy and inexpensive for do-it-yourself investors to consolidate their holdings from many fund companies under one roof.

* No money market losses. Money funds have been around for two decades and have yet to lose a dime, but there are no guarantees against it happening one day. Any loss would probably be small, but it could undermine the money funds’ impeccable reputation for safety.

There have been a few problems in recent years that forced management companies to reach into their own pockets to maintain their funds’ prices at $1 a share. Such bailouts are voluntary, however, and it’s possible that a smaller player might not be able to foot the bill.

The continuing stability of money funds is not something about which investors need to worry. But you can be sure that fund executives breathe a collective sigh of relief each year that problems are avoided.

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International value stocks have outperformed their growth rivals by a wide margin over the past 18 years, says a new study from Boston International Advisors, which manages an international fund for Boston-based Quantitative Group.

Value stocks in the 13 European and five Asian markets surveyed returned 17.6% a year from July, 1975, through Sept. 30 of this year, while growth companies averaged just 13.2% annually. The Standard & Poor’s 500 index rose 13.6% over the same period.

David Umstead, managing director of BIA and portfolio manager of Quantitative Group’s Foreign Growth & Income Series (the mutual fund referred to above), believes the discrepancy can be explained by human nature.

In short, he says, people tend to overreact in the short term by paying too much for growth stocks and too little for value companies. Eventually, prices will moderate to more realistic levels.

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A recent issue of Morningstar Mutual Funds lists three “small but spunky top funds,” also known as midgets with good track records.

They are Crabbe Huson Equity (no-load, 800-541-9732), the Greenspring Fund (no-load, 800-366-3863) and Schafer Value (no-load, 800-343-0481). All three seek long-term growth of capital by keying on value stocks.

The largest, Crabbe Huson Equity, had just $31 million in assets as of Sept. 30, placing its size among the bottom 60% of all growth funds. Schafer Value was the smallest at $21 million.

A Good Year

Most mutual funds have had a reasonably good year so far in 1993, and certain types of funds have done exceptionally well.

Foreign portfolios and various sector funds have bounced back strongly, as can be seen from this chart comparing 1993 year-to-date results with average annual returns over the previous five years.

1993 Avg. yearly Fund return return category (Jan. 1-Nov. 18) (1988-92) Gold +70.1% -6.7% Pacific stock +46.4% +6.4% International stock +30.5% +6.1% Global small stock +29.8% +10.5% Natural resources +24.2% +7.6% Global stock +23.6% +7.9% Science/technology +19.7% +16.6% Specialty +19.6% +15.2% European stock +18.9% +4.8% Real estate +18.8% +12.5% All equity funds +14.8% +13.8%

Source: Lipper Analytical Services