(MONEY Magazine) – For mutual fund investors in 1995, the basic prescription is simple: With the U.S. economy slowing, fill up on domestic funds favoring growth stocks that figure to appreciate 12% or more. And to benefit from a rising economic tide overseas, invest up to 15% of the money you have earmarked for equities in funds that buy foreign shares. Here's why, starting with the case for growth funds.

In general, growth stocks and value stocks take turns topping the market. (Growth stocks are shares in companies that historically have been able to boost earnings by 15% a year or more. Value stocks are those selling below the per-share worth of their issuers' assets or future earnings.) For the past two years, value was in vogue, as the recovery that began in the spring of 1991 boosted the earnings of economically sensitive corporations. Accordingly, the value-stock index kept by Prudential Securities has outperformed its growth counterpart 28.9% to 14.7% since the beginning of 1992.

Remember what happened to the Democrats on Election Day? Well, look for a similar shift in national leadership to occur in the stock market next year. With economic growth expected to slow half a point or so to 2.5% to 3% in 1995, many strategists, including Money's Michael Sivy, believe the market is poised to favor growth shares. Why? In a downshifting economy like 1995's, high-torque cyclical outfits that rev highest during the early stages of an expansion typically cede market leadership to sportier growth stocks that can more dependably churn out double-digit earnings gains.

Moreover, growth stocks are selling at very attractive prices these days. Recently, the price/earnings ratio of the average growth stock was just 1.8 times that of the typical value stock, according to the Leuthold Group, a Minneapolis stock research firm. The last time that ratio was below 2 was in mid-1988. Over the next 2è years, growth stocks gained a total of 80.6%, while value stocks advanced 48.9%. Says Leuthold analyst James Floyd of the current outlook: "Growth stocks look reasonable compared with value stocks and have begun to take the lead again."

To help you profit from this likely change in relative performance, we have identified nine superior mutual funds that specialize in domestic growth stocks. All have outperformed the average U.S. equity fund over the past five years and are optimally positioned to thrive in '95. In the profiles below, you'll notice that most have substantial holdings in technology and health care, two sectors that many analysts believe possess the best growth opportunities of the '90s. "The producers of today's capital goods--computer hardware and software and telecommunications equipment--will be the premier growth stocks," says Edward Yardeni, chief economist of the Wall Street firm C.J. Lawrence/Deutsche Bank. And with Republicans in control of Congress, the threat of health-care legislation that would crimp drug and hospital company profits has grown even more remote.

We have divided our nine domestic selections into three groups, according to the median market capitalization (total value of outstanding shares) of the companies they hold. By and large, small-cap funds invest in companies with market values of $1 billion or less; midcaps, in those pegged between $1 billion and $5 billion; and large-caps, in firms worth more than $5 billion. Our neck-on-the-line prediction for '95: If growth is king next year as we expect, our nine growth funds should average gains of 12%, compared with total returns of 10% or so for the S&P 500.

The argument for owning funds that invest in foreign stocks in 1995 is simple: Economic growth in many nations around the world will outpace that of the U.S. in 1995, and foreign stock markets will show bigger advances as well. Double-digit gains could emerge in Europe where economic recoveries are taking hold on the Continent, as well as from markets in Latin America and Asia--already rebounding from early 1994 downturns of as much as 15%. Reflecting the variety of conditions abroad, the three foreign funds we've chosen follow differing investment styles, but all have been outstanding performers that figure to return 15% or more in '95.

Detailed description of our choices appear below. All are no-loads except where noted; they are presented alphabetically within their categories.

SMALL-CAP GROWTH

Fund manager (and cover subject) Richard Aster, 54, gobbles up growth with his Meridian Fund, but only if the price is right. "I have heard growth fund managers say that they really like a stock so much they do not care what the valuation is," says Aster, pictured opposite. "We do care." Aster seeks companies that are generating earnings spurts of 15% or more a year, and he prefers to buy them when their price/earnings ratios are lower than their growth rates. As a result, the 35 fast-growing stocks in $246 million Meridian recently had a reasonable average P/E ratio of 18 times estimated 1995 earnings, not far above the P/E of 15 for the big-cap S&P 500 and 14.8 for the small-company Russell 2000. That has proved to be a formula for success. Over the past five years, Meridian rose at a 16.3% annual rate, vs. 11.8% for the average small-company fund. And buying cheaply helps limit downswings. "Aster has delivered consistently above-average performance while holding down the risk," says Craig Litman, co-editor of the No-Load Fund Analyst ($195 a year; 800-776-9555).

Aster's price discipline applies to selling decisions, as well. When he believes a stock is overvalued, he will ditch it even if he still likes the business. And he's not afraid to sit on his hands. Recently, Aster had 30% of the portfolio in cash. "We are not making a call that we expect a market downturn," he explains. "We just cannot find enough stocks to buy."

The stocks he has bought have positioned him well in market sectors likely to excel in '95. For example, 14% of his portfolio is in cellular-telephone stocks like $1.6 billion AirTouch and $250 million Cellular Communications. He has an additional 8% in technology issues and 12% in health-care shares like $235 million Surgical Care Affiliates, which builds and staffs outpatient surgical centers.

If you want to go all out for growth in 1995, you might hitch a ride with $650 million PBHG Growth. But fasten your seat belt. While the fund raced to outsize gains of 51.8% in 1991 and 48.6% in 1993, it skidded badly during the first half of 1994, dropping 15.7%, double the 7.9% loss for the average small-cap fund. By mid-November, however, PBHG Growth had moved back on track, up 1.1% for the year (vs. a 1% loss for the typical small-capper).

Manager Gary Pilgrim, 54, and his staff of 12 analysts scrutinize a database of 400 companies with projected annual earnings growth rates of 20% or more. To find the 80 stocks most likely to succeed in that group of growth getters, Pilgrim & Co. assess the "quality" of each company's earnings via such indicators as whether profits consistently come in above analysts' estimates. The portfolio, with an average market value of $475 million, recently included companies with a five-year annual earnings growth rate of 30%, vs. 18% for the average small-company fund. Technology stocks such as $107 million Zebra Technologies, a maker of bar code printers, accounted for 30% of assets. Another 22% was in consumer companies like $120 million Cobra Golf, a clubmaker. And 21% was in health issues such as $438 million Health Management Associates, an operator of rural hospitals.

A veteran of small-cap investing, 34-year-old T. Rowe Price New Horizons can still jab like boxing champ George Foreman. Manager John Laporte, 49, led the $1.2 billion fund to a 22% gain in 1993, compared with 17.1% for the average small-cap fund. In 1994, the fund was up 0.1% through Nov. 11, while the average small-cap fund had lost 1%. And Laporte's fondness for stocks with flashy track records (his selections recently averaged a five-year annual growth rate of 27%) should help it catch the growth-stock tail wind in 1995.

With big stakes in technology (20%) and health care (16%), the 100-stock portfolio resembles many of its growth-seeking peers. Laporte is firmly convinced that pressure to reduce medical costs--with or without sweeping reform legislation-will benefit prized health-care holdings such as $3.7 billion HMO operator United Healthcare (for more on United Healthcare, see page 44).

MIDCAP GROWTH

Lead manager Alexander Macmillan, 41, of $597 million Columbia Growth has mastered the tricky game of moving in and out of market segments to catch big upswings. Over the past three years, the fund logged an annual 11.1% average gain, vs. 9.6% for the typical equity fund.

Heading into 1995, Macmillan has 16% of the fund's assets in technology issues such as $24.8 billion Hewlett-Packard; 9% in health-care stocks like $11 billion Columbia/HCA Healthcare; and 7% in energy issues such as $515 million Anadarko Petroleum, a natural gas producer. That puts Macmillan right in sync with Money's 1995 forecast--which calls for strong performance by energy stocks--setting up 100-stock Columbia Growth for another outstanding year.

Doug Johnson, 40, has made big bets in stocks large and small throughout his 10-year tenure at the helm of $470 million Safeco Equity. More often than not, those wagers have paid off. The fund has averaged gains of 16.5% a year over the past 10 years and 14.1% annually over the past five--four to five percentage points a year better than the average equity fund. And this year, Safeco jumped 11.4% through Nov. 11, while the average equity fund lost 1.2%. The fund's holdings range from small-company zoomers like Callaway Golf (for more on Callaway, see page 70) to such big-company boomers as $2.6 billion media giant Knight-Ridder. The mix of 90 large and small companies gives the portfolio a median size that puts it squarely in midcap territory.

Johnson, who prefers to buy at a discount, recently had 14% of fund assets in technology stocks and 10% in utilities like $20.1 billion phone-service provider GTE. He likes such telephone utilities for their high dividends; GTE yields 6%, vs. 2.7% for the S&P 500.

Lead manager Howard Schow, 67, fills the 80-stock portfolio of $1.4 billion Vanguard/Primecap with high-growth companies that are temporarily (he hopes) out of favor with investors. Enough of Schow's fallen angels have regained their wings to give Vanguard/ Primecap average annual returns of 13.4% over the past five years, vs. 9.6% for the average equity fund. And Primecap ran ahead of the pack in 1994 as well, with a 11.7% gain to Nov. 11, vs. a 1.2% loss for the average equity fund.

Schow's prospects for 1995 hinge on the budding rebound in technology stocks, which account for 33% of the portfolio. Two of his favorites are European: $1.7 billion Vodafone of Great Britain, a cellular-phone service provider; and $11 billion Ericsson Telephone of Sweden, an equipment maker. Schow, who has run Primecap since 1984, also has a 8% position in the troubled airline and transportation sectors, where he believes cost cutting will produce higher profits next year.

LARGE-CAP GROWTH

Spiros (Sig) Segalas (pictured on page 34) is looking overseas for growth in 1995. Segalas, 60, who has managed Harbor Capital Appreciation to average annual gains of 18% over his 4è-year tenure (vs. 11% for the S&P 500), recently had 17% of the portfolio in foreign stocks. He also had major holdings in U.S. companies with sizable stakes overseas. The latter group included $17 billion Coca-Cola, which gets 64% of its earnings from abroad; $8 billion McDonald's, with more than 40% foreign profits; and two big technology firms: $4.7 million Microsoft and $22 billion Motorola. Segalas believes his stocks will notch 1995 earnings gains of 26% on average, far better than the projected 11.5% profit growth of the S&P. Says Segalas: "I think that stacks the odds in my favor for 1995."

Harbor's sector holdings fit the familiar growth pattern for 1995. Technology stocks, including the two noted above, account for 40% of the fund's assets. Another 13% of the portfolio is in health-care issues, including drugmakers $8.2 billion Pfizer and $3.8 million Astra, a Swedish firm. Segalas says he limits his holdings to 60 stocks, selling an issue whenever he wants to buy a new one. One benefit of that limit, he says: "Often that forces me to sell a stock that I might have held too long otherwise."

Although 125-stock IDS New Dimensions recently had 77% of its portfolio in stocks that are part of the S&P 500, it has outperformed that big-cap index during the past five years, with average annual gains of 13.7%, vs. 9.1% for the S&P. And it has shone both in tough years such as 1990 (up 5.4%, vs. a 5.8% loss for the average equity fund) and in boom years like 1991, when it soared 50.7%, vs. 36.8% for the average fund.

Gordon Fines, 49, who has managed this $4.3 billion, 5%-load fund since 1991, recently increased his technology stake to 29% (from 18% last spring), adding such major players as $14.6 billion Xerox and $10.8 billion Compaq Computer. Fines also has 6% of the portfolio in energy stocks, including $105 billion Royal Dutch Petroleum and $25.6 billion Amoco.

The dominance of cyclicals over growth stocks for the past two years has been especially hard on the $9.5 billion Janus Fund (up 19.9% since the start of 1992, vs. 24.2% for the average stock fund). But with growth coming back into style, James Craig, 38, who has managed Janus since 1986, figures to return to form. Craig has relinquished responsibility for Janus Venture to focus his attention on the flagship. And he's added four analysts (for a total of 18) to help him ride herd on Janus' 110-stock portfolio. "We continue to have great confidence in Craig's ability as a stock picker," says Ken Gregory, co-editor of the No-Load Fund Analyst. Gregory predicts that Janus will resume its above-average performance next year.

Like Segalas of Harbor Capital, Craig expects a boost from foreign stocks. A hefty 21% of the fund's assets are touring in overseas shares, including $35 billion Philips Electronics and $1.6 billion Wolters Kluwer, a Netherlands-based publisher.

OVERSEAS

With economic recovery just taking hold in most of the countries of continental Europe, $524 million Tweedy Browne Global Value seems especially well set for 1995: 63% of its assets are in European stocks. That allocation, however, is not based on an economic forecast but rather on a love of underpriced stocks. Says John Spears, 46, one of the fund's four managers: "Europe is where we find the best values."

Indeed, this year-old fund with a small-company bias (median market value of its 180 stocks: $780 million) is run on strict value principles. Spears explains that prospective purchases must fall into one of two categories. The first is stocks that look cheap in relation to their assets or book value. These tend to be slumbering cyclicals that should rebound with the revived economy, such as Guillard Musique, a $57 million French retailer of musical instruments and recordings, selling at just 70% of its book value. Category two: stocks with low price/earnings ratios, such as $225 million Dutch fiber-optic cable maker Twentsche Kabel, selling at just 4.1 times its past 12 months' earnings. Investors who worry that a rebound in the dollar from its current historic lows could wipe out overseas gains in 1995 should note that Tweedy Browne uses currency futures to protect against currency swings.

David Peebles, 55 (pictured on page 38), has proved adept at spotting the companies and industries that are ready to outperform the rest of the world. In the past five years, his $262 million USAA International has turned in a 10.2% return annually, compared with 7.2% for the average international fund. Right now, Peebles, who has run the fund since 1984, holds a mixture of value and growth stocks. His favorites include Autoliv, a $1.2 billion Swedish firm that makes air bags for auto manufacturers. Autoliv's earnings are expected to jump 20% to 25% a year over the next five years in part because its biggest customer, Volvo, plans to equip its cars with side air bags in addition to frontal ones.

USAA International's holdings total 122 stocks in 31 countries. Peebles' biggest concentrations are in Europe, where he has 37% of his assets, and Japan, which accounts for 25%, down from 30% earlier this year. (A 22% surge in the Tokyo market helped the fund post a 7.3% profit through Nov. 11, vs. 1.6% for the average international fund.) Peebles also has 19% in Asian markets outside Japan and 9% in Latin America. "We have always leaned toward emerging markets," says Peebles. "And we think these holdings will do well for us in 1995."

A knack for being in the right market at the right time has helped Richard King lead Warburg Pincus International to average annual returns of 13.2% for the past five years, nearly double the average international fund's 7.1%. This year, the $1.3 billion fund is up 7.8%, vs. 1.6% for the average entry. King, 49, got a boost from his 27% stake in Japan and a 6% position in the strong Korean market. He also has 26% in Europe, mainly in cyclical issues.

In 1995, the fund should also get some juice from emerging markets. King, who for nearly a decade was an investment analyst in Hong Kong, has 30% of assets in Pacific Rim countries outside Japan and another 9% in Latin America. As always, King's portfolio is in the midcap range at a median $2.7 billion. He explains: "We typically look at smaller companies, because that's where we are likeliest to find strong growth." And for investors like you, going for growth will be the best bet for big profits in 1995.