Edition: U.S. / Global

Mutual Funds; What Investors Want to Know

By Carole Gould
Published: October 14, 1990

The bear market, the looming recession and the crisis in the Persian Gulf have made everyone jumpy. Investors in mutual funds are showing their anxiety by monitoring their accounts more closely than usual: Telephone calls from investors surged in August and are still coming in at higher-than-normal levels at many funds, marketers at many large fund groups say. What follows is a sampling of the most commonly asked questions and an amalgam of answers from fund managers, economists and other experts.

Question: With the Middle East in turmoil and a recession near, what's going to happen in the financial markets?

Answer: Nobody knows, of course, because nobody knows whether a war will, in fact, break out. Nor does anyone know just how long - or how deep - a recession might be. But clearly, economic turbulence and uncertainty are not the stuff of market rallies, and one thing seems quite certain: The high-flying investment returns of the roaring 1980's are long gone.

Q. What will happen to my funds if war does break out?

A. Government bond prices might dip in response to inflation fears and then rebound strongly as investors make a headlong stampede to quality, says C. Frazier Evans, senior economist with the Boston-based Colonial Group. He says tax-exempt bond funds stand to benefit because governments usually finance wars by raising taxes, and higher taxes make tax-free income more valuable.

As for stock funds, a war could create ''bargain prices that might not be seen again for a generation,'' said A. Michael Lipper, president of Lipper Analytical Services in Summit, N.J. An extended conflict would also push up levels of spending in science and technology. Other likely beneficiaries: energy and natural resource funds.

Q. What's the best place to invest now?

A. Given the uncertainty, diversifying your investments makes more sense than usual. Today, many people have a large chunk of their portfolios in stock funds because stocks performed so well in the last decade, said Cornelia M. Small, director of research for the Scudder Group. But you may want to realign the balance among stock, bond and money-market funds. Adding foreign investments to the mix - but cautiously - also helps reduce risk.

One caveat: Even if your fund group does not assess a fee for switching money among funds, any switch that you make is treated as a sale for tax purposes.

Looking ahead, keep in mind that when the economy slumps, the weakest companies are hit hardest. Quality concerns are already reflected in bond funds, where the yield spread between government and ''junk bond'' funds widened in August.

Q. So should I move out of stock funds?

A. Despite the value of diversification, don't overreact. It doesn't make sense to bail out when prices are so low, and if you have made investments to meet long-term goals, stick by them. You may even want to add shares in stock funds to take advantage of price declines. This is a good time, experts say, to begin dollar-cost averaging - investing set amounts over regular intervals to bring down the average cost of the investment.

Q. What are the fund managers doing to minimize my losses?

A. Some managers are reducing their market exposure by building up large cash reserves. James Craig, who manages the Janus Fund, now has about three-quarters of his fund's assets in cash. Others have to remain invested according to fund bylaws. Vanguard, for example, keeps 90 percent of its assets in stocks. Fund managers should be able to tell you their current cash levels. And some funds, under their bylaws, can use options and futures to protect against falling markets. Check your fund's prospectus.

Q. Should I buy gold funds?

A. The runup in gold prices that began when Iraq invaded Kuwait is already over. But investments in gold traditionally are viewed as good hedges in times of economic and political instability. Nonetheless, gold is an extremely volatile investment. Most investors probably should keep no more than 5 percent of their portfolios in gold.

Q. Why has the price of my government bond fund shifted so much recently?

A. Remember, the ''government guarantee'' on these bonds means the principal is guaranteed when the bonds mature. But interim fluctuations can send the price all over the map. The threat of inflation pushed down bond prices in August, for example, but they stabilized last month. For long-term investors, the interim price fluctuations are unimportant. If you only bought your shares recently, it may pay to wait to sell them.


As a group, closed-end stock funds followed the market downward in the third quarter, losing 14.59 percent against a 14.86 percent drop in the Dow Jones industrial average. Prices for closed-end funds, which trade on listed exchanges like stock, are set by supply and demand and fund shares trade at a premium or discount to the value of the stocks in their portfolios.

Third-quarter performance was a change from the first half. Discounts on closed-end stock funds widened through the first half, meaning that share prices of closed-end funds did not keep pace with the value of the stocks in their portfolios. And the Herzfeld average, which tracks closed-end funds, lagged the Dow by an average of two percentage points through June. Discounts began to shrink in the third quarter, and the funds did a bit better than the market. ''Investors had a strong level of comfort in this group and didn't panic during the market rout,'' said Thomas J. Herzfeld, who specializes in closed-end funds.

Graph: monthly change in the Lipper Gold Fund Index, Jan.-Sept, 1990 (Source: Lipper Analytical Services); graph: weekly closes of the Herzfeld closed-end average and the Dow Jones industrials average, June 30-Sept. 28, 1990 (Source: Thomas J.Herzfeld Associates)