Investors linked to S&P; index reaped biggest returns during first quarter


Boring was beautiful for many investors in 1995's first quarter.

Those who kept their dollars close to home and chose funds invested in household-name companies generally fared better in the first three months of the year than those who ventured overseas, or bought funds specializing in stocks of lesser-known firms.

But those who chose the most boring option of all -- investing in a fund based on the Standard & Poor's 500-stock index -- reaped returns that beat the result offered by the average U.S. diversified stock fund, according to a tally of first-quarter results by Chicago-based Morningstar Inc.

In index investing, a fund manager simply buys and holds a selection of stocks that make up the index it tracks. Other fund managers pride themselves on more active management.

"For the S&P; 500, it was the best quarter since the first quarter of 1991," said Amy Arnott, associate editor at Morningstar Mutual Funds, a biweekly newsletter that tracks fund performance.

The S&P; 500 outperformed because so-called large-capitalization stocks, those of the biggest and best-known companies, fell into favor in the last months of 1994 and early 1995. These firms are heavily represented in the most popular indexes, such as the S&P; 500 and the 30-stock Dow Jones industrial average, which cracked the 4,000 mark in the first quarter.

"Big-cap growth stocks had lagged the market for well over two years," said Craig Litman, co-publisher of the No-Load Fund Analyst, a newsletter for mutual fund investors. "Big-cap growth stocks tend to do better in the later stages of a recovery, and I think the conventional wisdom is that we're in the later stages of a recovery.

"I would expect them to do well on a relative basis throughout the year, unless we get some sort of surprise event to jar the markets," he said.

Many big blue chips also have an overseas presence and attract investors looking for a way to participate in global economic growth without exposing themselves directly to the volatility of foreign stock markets.

Meanwhile, the average U.S. diversified stock fund trailed the S&P; 500, netting investors a 7 percent return in the first quarter. That's a nice rebound from 1994, when U.S. stock funds lost an lTC average 1.7 percent, according to Morningstar.

But it's still a full 2 percentage points below the S&P; average, which rose 9.7 percent when calculated as if stock dividends were reinvested, according to Morningstar.

Many fund investors did better than the average, of course. But Gus Sauter, vice president at Vanguard Group Inc., said those that did were "lucky enough to pick the superior manager."

Those who fared the best in the first quarter were those shrewed enough, or fortunate enough, to pick the right sector funds.

Funds specializing in the stocks of health care-related firms sported an average 10.3 percent return for the quarter, while those specializing in financial services returned an average 10.2 percent.

"We're still reasonably enthusiastic for the group," said Barry Kurokawa, co-manager of Invesco Strategic Health Sciences, which gave its investors a 12.8 percent return in the quarter, putting it at the top of Morningstar's health-stocks category. "We believe it still has prospects to outperform the market through the end of the year," he said.

Political considerations are among many factors Mr. Kurokawa cited for lifting health-care stocks out of the emergency ward over the last year.

With Republicans gaining more control in Washington, there's a perception that the regulatory environment will become more favorable for companies that produce medical products, he said. In addition, the chances of President Clinton pushing through any major health-care initiative are slim, he said. "That's an overhang that seems to have cleared here."

In a turnaround that should please investors who sought a weapon against the Internal Revenue Service, funds that specialize in municipal bonds brought in an average 6.2 percent total return for the quarter. That's an improvement over 1994, when the average municipal bond fund lost almost 6 percent.

Among funds that specialize in foreign stock, those focused on European companies outperformed funds specializing in other parts of the world.

Fallout from the economic troubles in Mexico, where the peso has been seriously devalued, as well as problems in Japanese markets, contributed to the poor results of many foreign stock funds, said Ms. Arnott at Morningstar's.

"I think clearly, Mexico was a real shock for a lot of people, and it continues to be," Mr. Litman said. Many investors were lured into overseas and so-called "emerging market" funds by tantalizing results of late 1993 and early 1994, without realizing the dangers inherent with such returns, he said.


Top performers in first quarter and 3-month total return:

Perkins Oppor. Fund -- 21.49%

GAM Global -- 20.90

API Trst: Yorktown Val -- 20.62

RPF Plan: Growth;A -- 20.25

RPF Plan: Growth;B -- 19.97

Fid Sel Air Trans -- 19.31

Fid Sel Electronic -- 18.12

GAM International -- 17.54

Govett: Smaller Cos. -- 15.63

J Hancock Av Tech -- 15.19

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