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‘94/’95 : Stock Funds: Simple May Be Best--Again : Portfolio: Plain-vanilla funds’ losses were limited. Advice for ‘95--don’t sell out, just fine-tune.

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TIMES STAFF WRITER

It could have been a lot worse.

That may be the best mind-set for stock mutual fund investors to adopt in reviewing 1994 fund performance--and in adjusting your portfolio for ’95.

Yes, 1994 was the worst fund year since 1990. Still, the average general U.S. stock fund lost only 1.6%, according to fund-tracker Lipper Analytical Services; with global and “specialty” funds included, the average loss was 2.3%.

What’s more, the second half of 1994 actually saw gains for many fund categories, after a dismal first half in which stock investors made the painful adjustment to a new world of rising interest rates.

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For example, the average “growth” stock fund was down 6% in the first half, but the full-year loss was a mere 2%, thanks to the market’s summer rally.

Perhaps the biggest surprise of 1994 was that investors who kept their portfolios simple fared best--a reversal of 1993’s results, when exotic specialty funds posted spectacular gains.

U.S. “growth and income” stock funds, which tend to invest in blue-chip American companies, fell 1% on average in 1994 after rising 11.5% in 1993. Small-company stock funds also fared relatively well, off 0.5% on average last year versus a 17% gain in ’93.

Contrast those numbers with many specialty funds’ results:

* Slammed by Mexico’s political upheaval, Latin American stock funds dove 14.2% on average in 1994, after rocketing 57% in 1993.

* Interest-rate-related selloffs in most Southeast Asian markets sent Pacific region funds down 12% in 1994 after a 64% surge in ’93.

* Gold funds, up 81% in 1993, gave back 12.1% in ’94.

* Real estate funds dropped 2.1% last year after a 22.6% rise in ’93.

The year’s big winner, meanwhile, fared less well than it seemed: Japanese stock funds were up 15.4% on average, but most of that gain came from the yen’s appreciation versus the dollar, which automatically boosted Japanese stocks’ values in dollars.

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International funds overall weren’t the panacea they had been made out to be by some excited fund advisers in 1993. Even so, their 0.8% average decline in 1994 was only half the loss of the average general U.S. stock fund--marking the second year in a row that international funds have outperformed U.S. funds.

For 1995, what worries some Wall Streeters is that last year’s minor fund losses could just be a setup for much worse.

The double-digit 1994 declines in transportation and utility stocks--two traditional market bellwethers--suggest that a deeper slide in blue-chip issues lies ahead, argues Michael Murphy, editor of Overpriced Stock Service newsletter in Half Moon Bay, Calif.

And at year-end, with short-term interest rates still rising, investors’ appetite for stock funds was waning. If the public turns away, a true bear market could become a self-fulfilling prophecy.

But some investment pros argue that most stocks--here and abroad--have already been through the wringer over the past 12 months. And investor sentiment is nothing if not overtly bearish already. “When the worry is the loudest is when I know it’s over with,” says Heidi Steiger, managing director of individual asset management at Neuberger & Berman in New York.

Even for people who fear a market plunge, Steiger says, it isn’t feasible to walk away from stocks completely. How would you know when to jump back in?

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A better strategy is to fine-tune your portfolio. Maybe it makes sense to hold what you have, but put new savings in “cash” reserves for a while. Maybe it’s time to get rid of a fund that has under-performed its category average for more than five years, and slowly switch into more promising funds.

Investors who can handle the risk obviously might be attracted to specialty funds that slumped badly in ’94. But for more risk-averse investors, plain-vanilla, well-diversified U.S. stock funds illustrated last year why they make sense for most people.

Indeed, many Wall Streeters say their favorite funds for 1995 are those that focus on high-quality, multinational U.S. growth stocks, such as health-care, consumer products and technology issues. Many of those stocks began to rebound in mid-1994 after nearly three years of being ignored.

Especially if the U.S. economy finally slows a bit, big U.S. growth companies that operate worldwide will look increasingly attractive, argues Michael Stolper, a San Diego-based money manager. “People will pay more for perceived stability of earnings growth,” he says.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

In Perspective

The average general U.S. stock fund lost 1.6% in 1994, the first annual decline since 1990. Returns by year:

Year % change 1981 -0.6% 1982 +25.9% 1983 +21.1% 1984 -1.3% 1985 +27.9% 1986 +14.0% 1987 +0.6% 1988 +15.0% 1989 +24.2% 1990 -6.3% 1991 +35.6% 1992 +8.9% 1993 +12.5% 1994 -1.6%

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Source: Lipper Analytical Services

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