Happy days are here again in stock funds, but no one knows exactly how long they'll last.
Thanks to high-flying results from positive elections in Brazil and Mexico and a resurgence in gold-mining equities, stock mutual funds as a group rallied for a 5.08 percent gain in the third quarter. That's the strongest return in nearly two years, ending a string of two down quarters.
All is not smiles, however. For the year, the average stock fund is up just 0.08 percent, led by carefully managed technology stocks and a revival in the Japanese market, which only recently has fizzled.
"After some down quarters, it's not surprising that you'd see a sharp upturn," observed A. Michael Lipper, president of New York-based Lipper Analytical Services, which tracks the nation's mutual funds. "My concern is that we didn't have enough of a correction to set the stage for strong upward momentum, so we may wind up with a flat period of several years."
The leading fund for the year employed some cautious portfolio management to ease the volatility of technology stocks.
had 52 percent of our portfolio in cash last spring, declining to 10 percent in July, and we're now up around 60 percent cash and holding just eight stocks," explained James Renck, senior ,, portfolio manager for Merrill Lynch Technology Fund.
Opportunities in semiconductor and semiconductor capital equipment stocks in particular have diminished and earnings will be only moderately strong, he believes. Micron Technology, since sold, was the fund's largest holding and a strong gainer this year. The fund is now bullish on Oracle Systems.
"The Tokyo stock market went up 23 percent, and our fund
outperformed that by 5 percent, with stocks such as Asahi Chemical, Nippon Electric and Alps Electric leading the way," said Shigekazu Kurishima, chairman of Nikko Capital Management, which runs the second-place Capstone Nikko Japan Fund.
Yet performance of Japanese funds was weak in the third quarter because that nation's economic recovery wasn't as strong as anticipated. Mr. Kurishima is convinced that the Asian market will outperform the United States, Europe or Latin America as confidence again builds.
Top performers through the first three quarters of 1994 among stock funds with reasonable minimum investment requirements, according to Lipper, were:
* Merrill Lynch Technology Fund, Class A, New York; $252 million assets; 6.5 percent "load" (initial sales charge); $1,000 minimum; up 29.9 percent.
* Merrill Lynch Technology Fund, Class B; same as above fund except with $458 million in assets and decreasing back-end load; up 29.05 percent.
* Capstone Nikko Japan, New York; $3.9 million; 4.75 percent load; $200 minimum; up 28.83 percent.
Lexington Strategic Investments, Saddle Brook, N.J.; $143 million in assets; 4.75 percent load; $1,000 minimum; up 28.11 percent.
* Seligman Communications and Information Fund, Class A, New York; $248 million; 4.75 percent load; $1,000 minimum; up 25.02 percent.
In the third quarter, gold had a definite shine to it.
"Ninety percent of our fund is South African gold-mining shares and, following the election in that country, the necessary political checks and balances seem to be in place," said Robert Radsch, portfolio manager of top-ranked Lexington Strategic Investments Fund.
Mining companies such as Western Areas and Rand Gold & Exploration became more cost-efficient, thereby boosting their stock prices. Mr. Radsch is convinced South African shares are still undervalued and Americans will be boosting their holdings in that country in anticipation of higher gold prices.
Meanwhile, Brazil winning the World Cup and its election of Fernando Henrique Cardoso as president helped give that country's stock market a dramatic boost.
"We built our holdings in Brazil, as well as Mexico, whose stocks also performed well after its national election," said Caroline Lane, London-based director with John Govett & Co., which runs the second-place Govett Latin American Fund.
Best-performing stock funds in the quarter among those with reasonable minimums were:
* Lexington Strategic Investments, same as above; up 45.16 percent.
* Govett Latin America Fund, San Francisco; $16 million in assets; 4.95 percent load; $500 minimum; up 31.45 percent.
* GT Global Latin America Fund, A Shares, San Francisco; $320 million; 4.75 percent load; $500 minimum; up 31.04 percent.
* GT Global Latin America Fund, B Shares; same as above but with $207 million in assets and declining back-end load; up 30.89 percent.