Posting annual returns of 33% and greater, international stock funds grabbed the first seven spots in the performance rankings of equity mutual funds most used by defined contribution plans for the year ended Dec. 31.
While the international equity sector performed well over the period, the two leading funds finished with returns at least 400 basis points greater than the next-highest ranked fund. The Harbor International Fund returned 45.42%, and the Vanguard International Growth Portfolio finished the year up 44.74% The third-ranked T. Rowe Price International Stock fund returned 40.11%. Coming in fourth was the Fidelity Overseas Fund with 40.05%, and in fifth place was the Templeton Foreign Fund with 36.82%
Those returns easily beat widely used domestic and international benchmark equity indexes. The Standard & Poor's 500 Stock Index returned 10.09% for the year, while the Morgan Stanley Capital International Europe Australasia Far East Index gained 32.94%.
Richard Foulkes, executive vice president for Schroder Capital Management International, London, is the portfolio manager for the Vanguard International Growth fund. He said 1993 was one of those years where "we got everything right." Both the fund's weightings among the world's countries and the stocks selected within those countries worked to give the fund its high-ranking performance. An additional boost was the fund's 9% allocation to emerging markets, which according to the MSCI Emerging Markets Free Index returned 71.24% in 1993.
The fund's eight largest country weightings, which make up 77% of the portfolio, were Japan, the United Kingdom, France, Hong Kong, The Netherlands, Switzerland, Malaysia and Italy, he said. Of those countries, only Switzerland's stock index outperformed the fund's holdings from that country.
Looking forward, Mr. Foulkes said although the fund has been underweighted in Japan, he is starting to think about when to get back in. In addition, the fund is not moving into European cyclical stocks, a move that has gained some popularity recently. "They've been running, but I'm resisting that to this point," Mr. Foulkes said.
The one-year performance rankings for fixed-income mutual funds most used by defined contribution plans were dominated by high-yield funds, taking the top six positions in the ranking. The No. 1 fund was the Keystone B-4 fund, which returned 26.22%. The second-ranked fund was the Fidelity Capital & Income Fund at 23.18%, which was followed by the T. Rowe Price High Yield Fund with 21.81%. Rounding out the top five were the Kemper High Yield Fund with 20.3%, and the MFS High Income Fund A, which returned 19.4%.
The Salomon Broad Bond Index gained 9.89% for the year, while the Salomon High Yield Index returned 17.37%.
Don Keller, a vice president and senior portfolio manager for Keystone Custodian Funds Inc., Boston, said a strong economy and falling interest rates helped the Keystone B-4 Fund achieve its top ranking. He said the fund got a boost from the performance of its investments in preferred equities, equity warrants and convertible bonds. He said one convertible issue it owned, EMC Corp., went from an issue price of 100, or par, to more than 500.
Mr. Keller said he expects another good year for the high-yield market in 1994 and 1995, with interest rates fairly stable and the economy continuing strong. "I don't see any sign of a recession."
In addition, he sees a shifting among high-yield issuers to companies creating new debt, as opposed to companies refinancing debt as they did in 1993, which should should reduce overall defaults, he said.
"A lot of the new issues ... are too young as debt for any problems to show up for a year or two," he said.
For the five-year period ended Dec. 31, many of the best performing equity funds widely held by defined contribution plans were growth funds.
The No. 1 fund was the Twentieth Century Ultra Fund, which returned a compound-annualized 28.03%. That fund was followed by three Fidelity funds: the ContraFund, which returned 26.5%; the Blue Chip Growth Co. Fund, with 23.58%; and the Growth Fund, at 22.22%. The fifth-ranked fund was the Janus Twenty Fund, which returned 22.02% for the five-year period.
The S&P 500 had a compound-annualized return of 14.53% for that period.
Christopher Boyd, one of the portfolio managers for the 20th Century Ultra Fund, said the fund benefited during the five-year period from two big industry groups, technology and health care. Being earnings-oriented stock pickers, the managers of the Ultra fund owned stocks in those sectors because of their earnings acceleration prospects, not because they liked the particular sectors. While the fund owns fewer health care stocks now, it still has a few - those that fund managers believe will be a part of the health care solution, not the problem, he said.
Looking ahead, the Ultra Fund's managers will continue to look at stocks that can benefit from the growth of the so-called information superhighway, and technology issues, such as semiconductor stocks, Mr. Boyd said.
For the five-year period, a high-yield fund again was the top-performing fixed-income fund among those most used by defined contribution plans. The Merrill Lynch Corporate High Income-A Fund was No. 1 with a compound-annualized 14.51%. The Merrill fund was followed closely by the General Electric S&S Program Short Term Interest fund, which returned 14.48%. The Fidelity Capital & Income Fund ranked third with 13.75%. Finishing fourth and fifth respectively were the Vanguard Fixed Income-Long Portfolio, with 13.19%, and the PIMCO Total Return Fund, with 12.74%.
The Salomon Broad Bond index returned a compound-annualized 11.35%, while the Salomon High Yield Index had 12.86%.
Vincent Lathbury, senior portfolio manager for Merrill Lynch and a manager of the Merrill Lynch fund, said the fund was boosted by a generally strong high-yield market, and a decision by Merrill's fund managers to get more aggressive with high-yield securities back in 1990.
At that time, the yield spread between junk bonds and Treasuries was more than 1,000 basis points, a level Merrill's fund manager thought was "ridiculously cheap," Mr. Lathbury said. Although the Merrill fund got in "a little early," shifting to lower-rated credits and buying zero-coupon securities, ultimately the bet paid off.
In 1994, Merrill's managers expect high-yield issues to have a total return of 10% to 15%. While they don't expect any help from rising Treasury prices - they see Treasuries floating in the 6% to 7% range - they do expect the spread to tighten between high-yield issues and Treasuries, resulting in rising high-yield bond prices, he said.
