Mutual funds investing in the riskier asset classes - high-yield bonds including distressed issues, and small-cap and emerging market stocks - were the top performers for periods ended March 31 despite the recent market shocks, according to data compiled for Pensions & Investments by Micropal Inc., Boston, on the mutual funds most used by defined contribution plans.
For the one-year period, led by the Vanguard International Growth fund's 31.94% return, subadvised by Schroder Capital Management International, London, all of the leading stock funds were international. Ranked second and third were Harbor International, subadvised by Northern Cross Investments Ltd. in Bermuda, with 28.15%; and Fidelity Overseas, with 27.46%.
Among domestic stock funds, the leaders for the year ended March 31 were Putnam OTC Emerging Growth; Templeton Growth and Merrill Lynch Growth Investment & Return. These funds ranked seventh, ninth and 10th, overall.
Over five years, domestic stock funds were on top. The leader was Twentieth Century Ultra fund, with a 23.38% compound annualized return followed by Fidelity Contrafund with 23.34%, and Fidelity Blue Chip Growth, with 22.2%.
The Standard & Poor's 500 Stock Index for the year returned 1.47%, and for the five years returned a compound annualized 12.1%.
In fixed income, for the year ended March 31, Keystone B-4 was first with 16.53% followed by Fidelity Capital & Income with 14.56% and Kemper High Yield, with 10.91%.
Merrill Lynch Corporate High Income ranked first for the five years, with a 13.84% compound annualized return followed by Fidelity Capital & Income with 13.73% and Vanguard Fixed: Long Term Corporate, which is subadvised by Wellington Management Co., Boston, at 12%.
The Salomon Brothers Broad Index returned 2.54% for the year, and an annualized 10.45% for the five years, while the Salomon Brothers High Yield Index returned 8.43% and 11.91% respectively.
The $2.5 billion Vanguard World International Growth fund was on top for the 12-month period because after a very strong fourth quarter in 1993, "I gave very little back," in terms of gains, in the first quarter, said Richard Foulkes, portfolio manager at Schroder.
Mr. Foulkes has done an about-face in his country weightings, slashing his holdings in Hong Kong, Singapore and Malaysia at the end of 1993 and shifting the money into Japan. His Japan holdings have risen to 29% vs. 16% at year end, while the other Southeast Asian weightings were lowered to 11% from 19% as the markets became too pricey, he said.
Despite Japan's gains in the first quarter, "the game in Japan hasn't really got going yet. ... I'm putting every penny I have into Japan. I still believe we're in a bull market for international," he said.
The fund also has substantial holdings in Italian telecommunications companies such as SIP and STET, "which are loving the Italian election results," Mr. Foulkes said.
On the domestic side, small-cap stocks buoyed the returns of the $7 billion Fidelity Contra fund. The fund invests about 25% in companies with market capitalizations of less than $750 million with an emphasis on turnaround situations. Among its larger holdings is Philips N.V., which is experiencing rapid earnings growth at a low p/e, he said.
Contra is using the correction to clear out poor performers and acquire new low-priced stocks. It is selling gaming stocks like Station Casinos Inc. as well as some health care, energy and biotechnology stocks on price weakness.
"Somehow you need a trigger of a falling market to tell you ... 'Do I like this stock enough to double down?'" said Will Danoff, portfolio manager.
The fund's cash position is at 16% and has been in that range since the end of last year.
"We're always looking to buy. Even in a horrible market there will be good stocks. We think the market will move sideways and will be a frustrating market like we've had for the last year," Mr. Danoff said.
Fidelity's $1.6 billion Blue Chip Growth Fund has done well because of the strong gains of some of its biggest holdings in the past six months. Among them: Lowes Cos. Inc., a building supply retailer primarily serving the Southeast, and Lotus Development Corp., a software company whose Notes product line is growing rapidly, said Michael Gordon, portfolio manager.
"We're taking advantage of buying companies whose stock prices have corrected," Mr. Gordon said. The fund added significantly to existing positions in: Intel Corp., Motorola Inc., Nucor Corp. and Caterpillar Inc.
Since January, Mr. Gordon has been buying bank stocks like Banc One Corp., Fleet/Norstar Financial Group and NationsBank Corp. and "growth" energy companies such as Anadarko Petroleum Corp. that should excel regardless of oil and gas prices, he said.
In fixed income, managers of high-yield bonds said they were less affected by the rise in long-term interest rates than other fixed-income sectors.
"Most high-yield bonds never go to maturity because they are refinanced or they default. The fund is less correlated with interest rates than high grades or Treasuries," said David Breazzano, portfolio manager of the $3 billion high-yield Fidelity Capital & Income fund, Boston.
The Capital & Income fund includes a significant amount - currently 20% - in distressed bonds.
The portfolio's biggest holdings include Nextel Communications and, on the distressed side, R.H. Macy & Co. Inc. MCI Communications Corp. has announced it will purchase 17% of Nextel, a wireless communications company, for $1.3 billion. The fund is one of the largest Macy creditors, and because that is true in many restructurings of its holdings, Fidelity attempts to add value by taking an active place at the negotiating table.
Jin Ho, senior portfolio manager of the $3.5 billion Putnam High Yield Trust, said he used the fund's defensive reserve of about 10% in cash and liquid securities to buy on the recent weakness. "We probably put to work $100 million in the last week," he said April 11, building existing positions and adding new holdings. Among his largest positions: Gaylord Container Corp. and Nextel.
Mr. Ho thinks the economy and corporate earnings look good for the rest of the year, and high-yield bond "valuations are certainly more attractive than they were toward the end of last year."
The top bond fund for the five years, the $3.2 billion Merrill Lynch Corporate High Income fund, also invests in high-yield bonds. Vincent Lathbury, the portfolio manager, favors securities offering asset protection, such as first mortgage bonds issued by and backed by the properties of gaming casinos like Mirage Resorts Inc., Showboat Inc. and Bally Manufacturing. Similarly, he likes equipment trust certificates on Delta Air Lines Inc., United Airlines and USAir Inc. "because the collateral is terrific." "Our portfolio (for the quarter) was up 1.1%. High-yield fared better than most high-quality bonds and stocks," Mr. Lathbury said.
Mr. Lathbury is confident 30-year Treasury bonds will stay in the 7% to 7.5% range through the end of the year, although short-term rates might rise by 50 to 75 basis points.