How on earth could a 24 percent gain feel so painfully gut-wrenching?
The average equity fund rose that healthy amount in 1997, contributing to an annualized return of 25 percent over the past three years.
But it did so amid continuous tumult over world events, volatility tied to both inflation and deflation concerns, and a general fear that we’d come too far too fast and would soon have to pay the price.
We danced at Dow 8000, then cried when the markets were hammered. Even the year’s final numbers were boosted dramatically by gains in its very last week. Expect such volatility to continue in 1998.
“There’d been a view that everything around the world was in reasonable control, but the Asian situation showed how quickly problems can be noted in the world markets,” said A. Michael Lipper, president of fund-tracker Lipper Analytical Services.
Biggest lesson learned in 1997, Lipper believes, is that while high returns don’t guarantee continued high returns, they don’t necessarily mean returns will become lower, either. For the year, S&P 500 index funds performed best of all with a 32 percent gain, followed by micro-caps at 30 percent and growth and income with 27 percent.
Top sector in the fourth quarter was utilities, up 11 percent, sparked as much by industry mergers as by a defensive mindset. But China region funds proved to be a disaster, down 30 percent, while Pacific region (excluding Japan) funds tumbled 29 percent.
Stock-picking ruled. The 300 percent gain in the stock of Senetek PLC, European manufacturer of a drug to alleviate male impotence, helped boost top-ranked American Heritage Fund to a 75 percent gain.
“This fund is not for the faint of heart, but for people who accept a calculated risk factor in order to get above-average returns,” said Heiko Thieme, portfolio manager of American Heritage Fund. “More investors are coming into our fund now, but many are still a little gun-shy about risk.”
He’s banking on stocks such as Miravant Medical Technology, Seagate Technology and Advanced Materials Group to provide pop in 1998.
“To reduce risk, we run a diversified micro-cap portfolio and limit ourselves to just 25 percent of our portfolio in any one sector and 10 percent in any one industry,” explained Carl Wilk, senior portfolio manager of Munder Micro-Cap Equity Fund, second in 1997 with a 71.53 percent increase.
Stocks doing the trick for his fund included Analytical Surveys Inc., up 221 percent; Fred’s Inc., up 162 percent; and AmerLink Corp., up 154 percent.
“Our portfolio can be fairly concentrated, with as much as 50 percent in two stocks,” pointed out Ted Kellner, co-portfolio manager of FMI Focus Fund, up 69.74 percent for the year. “We can also go short and do hedge positions.”
His shares of Bucyrus International, a maker of mining excavation machines, rose 120 percent as the company was acquired by American Industrial Partners.
Top funds in 1997, according to Lipper, were:
– American Heritage Fund, New York; $24 million in assets; “no-load” (no initial sales charge); $2,500 minimum initial investment; up 75 percent.
– Munder Micro-Cap Equity Fund, Birmingham, Mich.; $31 million; “A” shares with 5.5 percent load, “B” shares with redemption fee and “C” shares with level load; $1,000 minimum; up 71.53 percent.
– FMI Focus Fund, Milwaukee; $8.5 million; no-load; $1,000 minimum; up 69.74 percent.
– Lexington Troika Dialog Russia Fund, Saddle Brook, N.J.; $138 million; no-load; $5,000 minimum; up 67.40 percent.
– Pilgrim America Bank & Thrift Fund, Phoenix; $457 million; “A” shares with 5.75 percent load and “B” shares with redemption fee; $1,000 minimum; up 64.15 percent.
A brand-new fund, Berger Balanced Fund, won the fourth-quarter derby with a 37.89 percent gain, thanks to having a lot of startup cash on hand when the market tanked. It quickly bought rising stocks Dynatech Corp., Albertson’s Inc. and Cisco Systems.
“The market is probably going to rally the first part of the year and broaden out of the `nifty 50′ a little bit,” predicted Patrick Adams, co-portfolio manager of Berger Balanced.
Best performers in the fourth quarter of 1997 were:
– Berger Balanced Fund, Denver; $18 million; no-load; $2,000 minimum; up 37.89 percent.
– Princor Utilities, Des Moines; $77 million; “A” shares with 4.75 percent load; “B” shares with redemption fee; $1,000 minimum; up 19.24 percent.
– Smith Barney Telecommunications Income Fund, New York; $73 million; currently closed to new investors; up 18.91 percent.
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Andrew Leckey, a financial anchor on the CNBC cable television network, answers reader questions each Monday in Your Money.
