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Mutual Funds: THIRD-QUARTER REVIEW FOR INVESTORS : FIVE WAYS TO FIGHT FLAT RETURNS

October 02, 1994|KATHY M. KRISTOF

Even if you are frustrated by the stock market's lackluster performance, you don't have to throw in the towel. You can earn respectable returns on mutual funds in flat or bad markets, experts say, and you needn't give up diversification to do it.

Today, many fund managers are looking to overseas markets and investments shunned in better times--namely, commodities such as gold, oil, paper and industrial metals. Others are making money by betting against stocks.

Here's a look at the approaches of five successful fund managers.

T. ROWE PRICE SPECTRUM GROWTH

Peter Van Dyke, president of the T. Rowe Price Spectrum Growth Fund, doesn't have to search far to scan his universe of potential holdings. Instead of investing in particular stocks and bonds, Van Dyke invests his fund's assets in seven other T. Rowe Price funds. These seven funds specialize in everything from foreign equities and domestic growth stocks to income-producing stocks and cash.

The point of managing a fund that invests in other funds is diversification, Van Dyke says. Diversification limits stomach-churning market swings and, over the long haul, should provide a healthy return to investors.

Van Dyke is currently promoting three "themes" with Spectrum's investments: International, growth stocks and natural resource companies.

The choices reflect Van Dyke's conviction that many parts of the U.S. stock market have become overheated, but that stock markets in other parts of the world are another story. Many foreign economies are still battling their way through economic downturns. Some are just beginning to recover. Their stock markets haven't fully accounted for the coming recoveries, he says.

"By going to the international markets, you can pick up some equity returns that beat U.S. returns," Van Dyke says. And you can reduce the overall volatility of your portfolio, because domestic and foreign markets are functioning on different economic cycles, he adds.

The Spectrum Fund is limited to investing no more than 20% of its assets overseas. Van Dyke has been staying close to that limit for two years. If he could invest more of the fund's assets internationally, he would, he says.

"By going to the international markets, you can pick up some equity returns that beat U.S. returns," Van Dyke says. And you can reduce the overall volatility of your portfolio, because domestic and foreign markets are functioning on different economic cycles, he adds.

The Spectrum fund is limited to investing no more than 20% of its assets overseas. Van Dyke has been staying close to that limit for two years. If he could invest more of the fund's assets internationally, he would, he says.

In the domestic market, Spectrum is most heavily invested in T. Rowe Price funds that target fast-growing small companies, because Van Dyke thinks small firms' prospects are better than those of bigger firms. He is also hot on funds holding natural resource companies that tend to do well toward the end of economic cycles.

So far this year, Van Dyke's fund has done only slightly better than the market as a whole. Some experts say that's nonetheless impressive--mainly because the fund has proved to be less volatile, and thus safer, than similar stock investments.

* Assets: $843.1 million

* Objective: Long-term growth by investing primarily in a diversified group of T. Rowe Price mutual funds that invest in equity securities.

* Top three investments:

T. Rowe Price International Stock Fund

T. Rowe Price Growth Stock Fund

T. Rowe Price New Horizons Fund

* Sales charge: None

* Annual expenses: 0.0%

* Performance: +2.9% YTD

* Phone: (800) 638-7980

SOGEN INTERNATIONAL

When domestic interest rates ticked up this year, Jean-Marie Eveillard, manager of SoGen International Fund, bought fixed-income securities. Now 11% of SoGen International's assets are in U.S. corporate bonds and dollar-denominated South American notes that pay double-digit yields.

Historically, returns in the stock and bond markets have averaged between 9% and 10%, he explains. "So, if I can get a five-year piece of paper with a 10% yield, I'm going to just sit and clip coupons."

The rest of the fund's assets are in cash (22%), foreign stocks (35%) and gold-related securities (10%). Only 22% of SoGen International's assets are invested in the domestic stock market. Why? There are few bargains in the U.S. stock market today, Eveillard says.

Some foreign markets look better, but today's "synchronized worldwide economic recovery" is sure to spur some inflation. And, as far as stock and bond markets go, inflation spells n-e-r-v-o-u-s in all languages. The few stocks Eveillard is still buying are in businesses that do well when inflation is rising: base metals, forest products and real estate. And because he considers himself cautious, he is maintaining a healthy cash cushion to soften market blows.

"We have always been on the side of caution," Eveillard says. "When the markets are strong, that was not so good. But we hold up well in a difficult market."

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