Don’t Judge a Book by Its Cover or a Mutual Fund by Its Name

Anytime you’re looking at mutual fund investments, Shakespeare’s question “what’s in a name?” should never be too far from your mind.

Updated for the 1994 marketplace, the message might read, “Never assume that a fund operates on the philosophy that its name seems to imply.”

Consider the Fidelity Blue Chip Growth Fund, a $1-billion fund with an impeccable pedigree and high marks from independent advisory services--but also a portfolio that really stretches the definition of “blue chip.”

The fund’s recent investments have included such large, long-established enterprises as Ford Motor, Texas Instruments, Whirlpool and Deere.

But the list also bristles with names like Hornbeck Offshore Services, Informix and Mirage Resorts Inc., none of which will be candidates for the next vacancy in the Dow Jones industrial average.

When Michael Gordon took over as the fund’s manager last year, “he immediately started buying small- and medium-cap stocks,” reports analyst Amy Arnott in the Morningstar Mutual Funds advisory service.

“Given Gordon’s past record at Fidelity, this fund has a good shot at sustaining its success,” Arnott added. “It’s important for shareholders to realize that this is far from a traditional blue-chip offering, though.”

Or look at Blue Chip’s sister fund, the Fidelity Dividend Growth Fund, which started operations about a year ago with Abigail Johnson at the helm.

It got off to a promising start toward its stated objective of “capital appreciation.” But dividends? So far it has paid out precisely a penny a share in dividend distributions, which works out to a yield of less than 0.01%.

The fund’s largest single stock holding at last report, Home Shopping Network, has been a popular growth stock but has never paid a cash dividend. The Fidelity group, the giant of the fund business at nearly twice the size of its nearest rival, is known for giving individual fund managers wide latitude. But it isn’t the only place where names don’t always fit.

There’s the Warburg Pincus Growth & Income Fund, which has been attracting a lot of attention and above-average performance ratings from Morningstar and the Value Line Mutual Fund Survey since Anthony Orphanos became its manager in 1992.

“It returned over 37% last year, making it one of the best-performing funds in the growth and income group,” Value Line reports.

Terrific growth. But income? The reported dividend payout in the last year of 12 cents a share works out to a yield of less than 1%.

Fund-name misunderstandings can occur just as commonly in the realm of fixed-income investing. In recent years, for instance, it has become painfully clear that a “government securities” fund can hold anything from ultra-safe Treasury bills to bits and pieces of mortgage debt that qualify as some of the most speculative bets anywhere.

Or take the phrase capital preservation, which crops up now and then in fund names.

Benham Management Corp. in Mountain View, Calif., runs the Capital Preservation Fund and Capital Preservation Fund II, both money market funds with an emphatic safety-first philosophy. Money funds seek to maintain constant net asset values so that their shareholders experience neither capital gains nor losses.

The Keystone America Capital Preservation & Income Fund II, by contrast, seeks “current income with low volatility of principal,” investing mainly in adjustable-rate mortgage securities.

According to Morningstar, the fund’s net asset value dropped from $10.07 at the end of 1991 to $9.82 a year later, before recovering to $9.87 by the end of 1993.

The 1993 performance “shows that it learned its 1992 lesson well,” says Morningstar analyst Erik Laughlin. “The fund suffered relatively big capital losses in 1992 as a result of its willingness to dabble in such risky derivative securities as interest-only strips.”

Now, Laughlin reports, the fund has “dumped its derivatives.”