While stock prices, on the average, may be near all-time highs, the broad stock market, as measured by the Standard & Poor's 500 Composite Stock Price Index, is barely up for the year to date.
The same can be said about the performance of equity mutual funds, whose average total return was a mere 0.2 percent for the first seven months, according to Lipper Analytical Services.
Because a return of only 1 percent was above average under these circumstances, a return of 16.8 percent has to be regarded as impressive. That was the average posted for the funds in Lipper's financial-services category, thanks primarily to their continued benefit from the strong recovery in bank stocks.
Can financial-services funds keep up the momentum, making them worth your examination?
No one knows, of course, but three points may help as you think about whether one might be suitable for you:
* Funds concentrated in one in dustry are more risky than general equity funds invested in several industries. Financial-services funds also did well in 1991, when they had a 60.6 percent return, but note that Lipper had calculated returns of a negative 12 percent or more for them in two of the previous four years. Consider these funds only if you can accept their volatility.
* Although the stated investment objectives of all funds in the group are capital appreciation, their investment policies differ considerably. Some are diversified, in varying ways, across the financial-services industry. Others are concentrated in its main sectors: banks, savings & loans, insurance, or brokerage.
* The funds' managers say they continue to find good values, especially among bank and insurance stocks, as the industry continues to recover from bad real estate loans.
As the banks' cost of money has fallen faster than the interest rates they charge on loans, their profit margins widened, making it more rewarding to be an owner of bank shares -- directly or via funds -- than a lender buying banks' certificates of deposit. (The shares, of course, are not federally guaranteed.)
Douglas N. Pratt, who early this year took over the Financial Funds' Financial Services Portfolio -- one of the diversified funds -- raised his fund's bank-stock allocation from 25 percent of net assets to 85 percent by May. Since then, he has trimmed the banks' share to 65 percent by taking profits in some regional banks. He has invested the proceeds in life insurance companies, raising their share in his fund to 20 percent.
Mr. Pratt's biggest weighting -- about 25 percent -- is in money center banks, like Citicorp. Recalling the problems with developing countries' and real estate loans, he says: "We've seen the worst of those mistakes. There's now some return to normality in earnings.
Bruce Herring, who manages both Fidelity Select Financial Services and Fidelity Select Insurance, has his fund 50 percent in banks.
In choosing bank stocks, Mr. Herring says, he emphasizes strong balance sheets and growth of book values. "When the recovery is in full bloom," he said, "I'll be more interested in earnings growth."
1992 Werner Renberg