The Right Sectors Getting Harder to Find

Sector funds provide the asterisks of the mutual-fund industry.

Fund families often list them as "specialty funds." And for individual investors, who usually hold at least one large diversified equity fund, they also represent an asterisk. As in * Wow. I made some money there. Or, * Whoops. How did that happen!

Sector funds can put a little kick into your portfolio during a slumping market, when broadly diversified stock founds are running in third gear, experts say.

A sector fund manager focuses entirely on the stocks of a narrow range of companies.

Sectors include such diverse areas as financial markets (banks, brokerage houses, insurance companies); energy (oil, natural gas); utilities (electricity, phone companies, telecommunications); commodities (gold, silver); biotechnology; and health care.

Hit the right sectors - those either posting strong growth or ready to recover ahead of the broader market - and you could dazzle your friends at dinner parties with your financial acumen.

Of the major sectors, only a few have escaped the storms whipping through Wall Street. The powerful financial sector, for example, is off some 6 percent, as measured by the New York Stock Exchange Finance Index; natural resources, down almost 20 percent, as measured by Lipper Analytical Services. Gold is down at least 10 percent, says Lipper.

But the utilities sector is up at least 5 percent, says Lipper; health and biotechnology are up almost 8 percent; science and technology are up just under 10 percent.

"If I had any new money right now, I would [put it] in the large-cap technology sector [firms such as Microsoft and Intel] and the financial sector," says Christopher Burnham, president of Columbus Circle Investors, which manages a number of funds for California-based PIMCo group.

Both areas have taken major hits in the past half year, he says. Yet, Mr. Burnham believes that the market is poised for a rebound, certainly by June 1999.

"Since World War II, the average bear market has lasted 353 days. Since 1987, the average bear market has lasted only 77 days," Burnham says. So historical performance indicates an upturn not too many months off, he says.

A bear market is one in which the broader stock-market averages decline at least 20 percent. Some analysts think we are currently in a bear market that started in August.

Moreover, Burnham sees current market turmoil in large part stemming from "uncertainty" rather than fundamental flaws. Problems such as President Clinton's standing and financial crises abroad have pulled the rug from under stocks.

Once those issues stabilize, the cloud over US stocks should lift, he believes.

Joan Ellis, a portfolio manager and analyst with US Trust Corp., based here, also sees the financial sector as providing solid defensive positioning. She likes financial concerns - such as regional banks - linked to the domestic US market and with little or no international business.

She also favors financial companies that focus on consumers rather than corporate customers.

Still, not all analysts believe we've seen the bottom in the financial sector. "I think we may see more difficulty there," says Robert Dickey, managing director with investment firm Dain Rauscher, Minneapolis.

But Mr. Dickey, who believes that the overall market may now have bottomed, likes technology stocks, including those of small companies - which he thinks may start to outperform the market - and the energy sector.

He sees the Dow Jones Industrial Average in the high 8000 range by January, on its way past 9000 by next spring.

If sectors sound seductive, make certain you don't buy a sector fund that duplicates holdings you may already have in a broadly diversified equity fund, says Ms. Lallos.

Remember that "sector funds are not diversified," she says. If the sector gets clobbered, as energy has for the last year, then the fund owns no other stocks that might cushion the fall.

A diversified fund might own energy stocks, for example, plus retail stocks. The first group hit a dry hole this year while the second rang up record numbers.

For younger investors, the volatility of sector funds might mean little. They can absorb the risk because they have the time to ride out the losses, and they can be reasonably certain that certain sectors - such as energy and technology - will show strong, long-term growth.

But for people closer to retirement, sector funds need only careful research. You should have a well-informed opinion that a sector is set to perform well.

Average investors with more than 20 percent of their portfolios in sector funds may find themselves in a riskier position than expected, she says.