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From tobacco to bond funds
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February 19, 1999: 5:46 p.m. ET
And some winners and losers in Morningstar's large blend fund category
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NEW YORK (CNNfn) - Fidelity's flagship Magellan Fund earned 33.63 percent and beat the S&P 500 in 1998 by giving up Big Tobacco in favor of an Internet heavyweight.
Philip Morris (MO) had been a top-ten holding in the $88.1 billion fund until the mutual fund Goliath started selling its shares in favor of America Online (AOL), said Donald Dion, president of Dion Money Management Inc. in Williamstown, Mass.
It didn't take long for AOL to leap to number three on Magellan's roster of stocks, he said.
"It's unusual for a new holding to end up number three in the top ten," said Dion, publisher of the newsletter Fidelity Independent Adviser. "AOL really helped Magellan's performance during the last quarter of 1998."
What does that mean for individual investors? Dion says money managers and fund managers are likely to follow Magellan's lead -- so your fund may have AOL on its balance sheet when you get your quarterly statements.
Likewise, Dion said managers might be eyeing chemicals and cable after billionaire stock picker Warren Buffett disclosed he bought stakes in Great Lakes Chemical and TCA Cable TV.
"A lot of fund managers follow Magellan and Warren Buffett," Dion said. "It's already exaggerated selling of Philip Morris."
The U.S. bond market came under pressure earlier this week after the yield on Japanese government bonds started soaring, sending prices way down.
But this doesn't mean that investors of U.S. bond funds need to worry or adjust their holdings as a result of what's happening in Japan, said Steve Chung, a fixed-income mutual fund analyst at Morningstar.
If Japanese yields keep rising, it could create bargain prices for U.S. bond funds that invest in Japanese government bonds, such as the Black Rock International Fund or the Federated International Income Fund. Both funds have 20 percent of their holdings in Japanese government debt, he said.
In another scenario, if Japan's overall economic policies trigger more global instability, it could mean another rate cut by the U.S. Federal Reserve, Chung said. That would be good for U.S. Treasury bond funds like Vanguard's Intermediate Term U.S. Treasury Fund.
"But for the average investor with fixed income in his portfolio, the impact would be pretty indirect," Chung said.
In a universe of thousands of mutual funds, it isn't always easy to keep up with performance data. So every week, CNNfn will look at three winners and three losers in different fund categories.
In Morningstar's large-cap blend fund category, shares of Pfizer (PFE) and Schering-Plough (SGP) paid off for one winner, the Avondale Hester Total Return Fund.
Large-cap blend funds "invest evenly across the spectrum of U.S. industries," with holdings in financial stocks, cyclicals, consumer staples and services, according to Morningstar.
Out of about 800 funds reviewed in the category, the stocks include General Electric (GE), Cisco Systems (CSCO), Bristol-Myers Squibb, Merck (MRK), Intel (INTC), IBM (IBM) and Exxon (XON), among others.
Avondale Hester, with $10.7 million in assets, earned 2.19 percent between Feb. 12 and Feb. 18, Morningstar said. Morningstar gives the fund three out of five stars, a rating adjusted for risk and returns.
The top fund in the category for the week was ProFunds UltraShort OTC Investor, earning 6.09 percent. The fund isn't rated. Third on the list is Schroder Large Capitalization Equity, gaining 2.16 percent. Schroder, with $70 million in assets, is ranked with four stars at Morningstar.
But every winner creates a loser. At the other end of the spectrum, the three worst performers in large cap blend funds are Kobren Growth, down 2.43 percent this week; Tip Target Select Equity, off 1.77 percent; and Countrywide Growth/Value, giving up 1.72 percent.
-- Staff writer Martine Costello covers mutual funds for CNNfn Interactive. If you have any comments about mutual funds, send an e-mail to my attention at the following address: cnnfn.interact@turner.com
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