Shifting to Lower Gear as Market Hits New High

RUSS WILES, <i> a financial writer for the Arizona Republic, specializes in mutual funds</i>

Investors who are uneasy about their mutual funds with the stock market at record highs have several options available:

* They can maintain their current holdings and hope for the best.

* They can liquidate their positions and pray the market doesn’t vault higher.

* They can shift some assets or direct new investment dollars into lower-risk stock funds.


This column deals with the third option, an obvious compromise.

Several stock-fund categories carry less risk than the broad market and pay higher dividend yields. They also look relatively cheap, having been battered by spiking interest rates last year.

Funds in some of these categories would make good core holdings for a portfolio, through just about any investment and market climate. Others aren’t that well diversified, so you wouldn’t want to have too much exposure. Either way, all of the following categories generally will give you a smoother ride than the typical stock fund.

* Utility funds. Mutual funds that buy shares in electric, natural gas and, to a lesser degree, telephone stocks are unlikely to see a year as bad as 1994 any time soon. The funds produced a minus-9% average return for investors last year, even after factoring in dividend yields that averaged nearly 5%, according to Lipper Analytical Services in Summit, N.J.


Utility funds didn’t stumble that much even in the early 1980s, when interest rates were much higher and nuclear energy a more worrisome issue.

Although spiking rates caused most of the damage in 1994, investors also worried about the impact of deregulation in the electricity business.

“There will be winners and losers in regulation, and these concerns are already partly factored into utility stock prices,” says Dick Strong of the Strong Funds in Milwaukee.

He predicts interest rates will decline over the next few years, which explains his optimism for the utility sector.

Strong American Utilities Fund (no load, (800) 368-1030) has logged one of the better records in the group over the past year or so. Other better performers include Fidelity Utilities (no load, (800) 544-8888) and Fortress Utility (1% load, (800) 245-5051).

At last count, utility funds were yielding 4.2% on average, the highest rate of any stock category, according to Morningstar Inc. of Chicago.

* Convertible funds. It’s somewhat misleading to include these as a stock-fund category. That’s because convertibles are interest-bearing bonds, with, however, an important twist: If the issuing corporation’s stock price does well, the bonds can be exchanged for or converted into a specified number of shares.

Until then, investors continue to collect interest payments, which for the funds as a whole are averaging 4.1%.


“Convertibles tend to rise and fall with stocks, but not as fast,” says Hugh Mullin, portfolio manager of the Putnam Convertible Income Growth A Fund in Boston.

“They have about 80% of the upside potential of stocks, but only 50% of the downside risk,” he says.

Mullin and co-manager Charles Pohl believe convertibles will fare well down the road if, as they expect, interest rates continue to stabilize, the economy continues to grow and the volume of new convertibles coming to market remains low.

Many convertible bonds are issued by medium and smaller companies who would have trouble attracting investors without the stock-market kicker. This gives the funds something of a small-stock flavor.

“We see them as a lower-risk way to invest in smaller and medium companies,” Mullin says.

In addition to the Putnam fund (5.75% load, (800) 225-1581), some other good choices include Fidelity Convertible Securities (no load, (800) 544-8888) and MainStay Convertible B (5% load, (800) 522-4202).

* Equity-income funds. Unlike the two preceding categories, funds in the equity-income camp are sufficiently well-diversified to be good portfolio anchors.

They buy some of the largest stocks around--common holdings include firms such as Philip Morris, General Electric and American Express. These pickings tend to be value plays in that equity-income managers look for stocks selling at relatively low price-earnings and price-book value ratios; they also look for heftier dividends.


The funds yield about 3.2% on average, the highest payout of any of the mainstream stock categories.

Many of the firms they invest in also represent turnaround situations--the typical stock holding has only 1/20 the profit growth rate of the typical company in the Standard & Poor’s 500 average, according to Morningstar.

Some of the bigger funds with good records include Capital Income Builder (5.75% load, (800) 421-4120), Fidelity Equity-Income II (no load, (800) 544-8888), T. Rowe Price Equity-Income (no load, (800) 638-5660) and USAA Mutual Income Stock (no load, (800) 382-8722).

Equity-income funds don’t differ all that much from their counterparts in the growth-and-income camp, a larger category. The biggest distinction is that the latter funds aren’t so heavily skewed to value stocks, nor are their dividends as rich.


Salomon Bros. Asset Management of New York has introduced a new family of mutual funds. The family will consist of five bond portfolios, one stock fund and one money-market fund. The funds will be sold through brokers with a sales charge, in different classes of shares. The minimum investment is $500.

Salomon Bros. Asset Management ((800) SAL-OMON) currently manages $11.7 billion for institutional and large private clients.


Thomas Frank of New York-based Dreyfus Corp. has been named variable-fund manager of the year by Morningstar Inc.

Frank runs a small-stock portfolio for the Dreyfus/Transamerica Triple Advantage Variable Annuity. His portfolio returned 6% last year, following double-digit gains in 1992 and 1993 and a 161% surge in 1991, when the portfolio was much smaller.

He’s the first recipient of Morningstar’s manager-of-the-year honor for variable annuities. *

Bond prices tend to bounce back nicely following sharp market sell- offs, says Massachusetts Financial Services in Boston. In the 10 worst 12-month periods for bonds (excluding 1994’s debacle), long-term government bonds returned nearly 10.7%, including interest, over the next 12 months.