Sizing up a fund for its roller-coaster effect

At first glance, a mutual fund doesn't seem like the sort of investment that merits risk analysis. The theory is that you've entrusted your money to some savvy financial guru who will use the money, and that of your co-investors in the fund, to reap better-than-average returns. The question in choosing a mutual fund is usually the size of those returns, not how much risk is involved.

The markets have changed, however - in some ways radically. Business cycles seem to be shortening; the economy has jumbled several important, time-honored relationships - such as those among inflation, interest rates, and real interest rates - and, in response, the stock market has acquired more trick moves than the Harlem Globetrotters. Even the sharpest of stock pickers can find themselves with a bear on their hands when they thought they'd roped a bull.

So investors might take a look at the inherent risk (risk being the potential for an investment to lose money) of several mutual funds before choosing one for their money. One convenient measurement of that risk is ''beta.''

Long used by institutional money managers and research analysts, beta is a calculation that measures the volatility, and therefore the risk, of an equity investment. Calculating beta is a more complicated task than most investors - much less financial writers - care to engage in, but books, such as the ''Individual Investor's Guide to No-Load Mutual Funds'' (published by the American Association of Individual Investors in Chicago, $20 membership fee), and stockbrokers can provide the figures.

Beta pegs the rate of movement for an equity investment relative to a broader market index, usually the Standard & Poor's 500. A beta of 1.0, for example, means that when the market index moves up one point, so does the investment. A beta of 2.0 means the investment moves up twice as fast, two points for every one point up in the market index. A mutual fund that carries a beta of 1.2 would move up 20 percent as fast as the market.

The risk element comes in when the market shifts into bear country. Beta tells how fast a mutual fund will move down, as well as up, compared with the market. A beta under 1.0 means lower risk, since the investment will move down more slowly than the market index. What some experts advise, therefore, is looking for a fund with a high rate of return and a low beta. The bottom line is a high risk-adjusted rate of return (RAR).

Janus Fund, for example, has an 0.89 beta, according to the ''Individual Investor's Guide to No-Load Mutual Funds,'' and a 25.5 percent compounded annual rate of return over the last five years. That translates into a high return, low beta, and, therefore, a potentially good pick - perhaps better than one of its competitors, Loomis-Sayles Capital Development, which produced a 25.7 percent five-year return with a beta of 1.21 percent. The risk-adjusted rate of return is higher for Janus than Loomis. (RAR is a calculation that weighs a risk-free return, such as Treasury bills, into the return of a specific investment.)

''A low beta is not so much a goal as a consequence,'' says Tom Bailey, president, founder, and fund manager of Janus Management Corporation in Denver. ''We don't aim for a low beta, but most of our investors like as little pain as possible, so we take out as much of the risk as we can. It's pretty simple. When the market gets bad, we go into cash.''

Janus now has about 55 percent of the fund in cash, and ''we're thinking about raising more,'' Mr. Bailey says. Prior to the August rally, Janus had as much as 75 percent of the fund in cash.

Beta seems a helpful gauge in picking a mutual fund, but how much weight to place on it is a different question. Five years ago, for example, if an investor had picked Loomis-Sayles over Janus, he would now have more money, regardless of the beta. Past rate of return already includes market ups and downs. Perhaps historic rate of return, plus investment goals, should form the primary criteria.

''Three or four years ago, I would have said you were exactly right,'' comments Robert Steers, chief investment officer at the National Securities and Reserve Corporation, which manages several funds in New York. ''For a lot of people, past is prologue, and looking at the historic rate of return for a mutual fund used to be the best way to choose one.

''But this recovery and this economy are drastically different from what we've seen in the past. . . . We think the '80s are going to be the flip side of the '70s. In the '70s, inflation and low real interest rates made it smart for companies to leverage up, go out and borrow. We think the '80s demand just the opposite strategy. The bottom line is that since the economy has changed so much , historic returns for a mutual fund will disappoint expectations for future performance.''

Beta, then, becomes an important consideration in evaluating risk and potential performance. The calculation may not be indispensable, but the concept of measuring risk is.

''There are other fundamentals that should be considered for investor suitability, such as the investment philosophy of the fund,'' says Mr. Steers. ''But beta is certainly an important element.''