Out With the Web, In With Insurance

So, what funds do you like in the insurance and utility sectors?

If this keeps up, cocktail-party stock chatter will soon be taking on a new tone--if it hasn’t already.

The financial services, health-care and utility sectors were the trifecta in terms of stock mutual fund performance in the third quarter, gaining 21.4%, 12.3% and 8.2%, respectively.

And in a further sign of the changing market mood, mid-cap value and small-cap value funds outperformed all growth-fund categories, just as they did in the second quarter, according to fund tracker Morningstar Inc.

One reason for the emergence of mid-caps could be the attention more investors are paying to underlying stock valuations these days: As a group, medium-size stocks are still cheaper than blue chips when their average price-to-earnings ratios are considered relative to their expected earnings growth rates.

The search for value also led many investors to financial stocks, including banks and insurance issues, in the quarter. It didn’t hurt that market interest rates fell in the period.

Insurance stocks also got a lift as more of the companies have raised premiums to boost earnings. Fidelity Select Insurance fund returned 26.8% in the quarter, the sixth-best performance of any stock fund.

Another winner was Fidelity Select Home Finance, which jumped 31%. The volatile fund, which primarily owns stocks of mortgage companies, posted double-digit losses in 1998 and ’99 after lofty gains in the prior three years.

Health-care funds were stoked by a rebound in HMO stocks and continuing speculation in biotech stocks. Meanwhile, political posturing over potential price controls has been only a minor headache for big drug stocks.

Among the third quarter’s big winners: Dresdner RCM Biotechnology, up 26.7%, and Nicholas-Applegate Global Health, up 24.3%.

The Dresdner fund posted a modest gain in its 1998 debut but now is on pace for its second straight year of triple-digit gains as excitement over the mapping of the human genome has lifted genomics-related stocks along with other biotech names. Nicholas-Applegate Global Health is on pace for a triple-digit gain in its first full year.

The health-care sector overall sustained its momentum from the second quarter, when the funds rose 18.1%, on average. Who says stock-market returns of 20%-plus are a thing of the past? Health-care funds were up an average of 58% year-to-date through the third quarter.

Utility funds’ average gain of 8.2% in the quarter was fueled byelectric utility stocks, as investors--like everyone else--couldn’t help but notice those zooming electric bills amid tight power supplies.

Galaxy II Utility Index fund soared 32.7%, topping the domestic equity winners list, as stocks including Enron Corp. and Duke Energy Corp. acted like “dot-com” shares of yesteryear.

The New Alternatives fund, which invests in companies developing sources of renewable energy, returned 32% in the quarter.

The utility sector might have performed even better, except that many of the funds are loaded up with slumping phone-company stocks.

Meanwhile, some growth funds with major technology stakes managed robust gains despite the tech sector’s woes.

Van Wagoner Emerging Growth, a mid-cap fund run by Garrett Van Wagoner, returned 20.6% in the quarter. It is closed to new investors, but Van Wagoner’s other funds have also held up well, notwithstanding a rough September.

Merrill Lynch Focus Twenty, a new large-cap growth fund with only a couple dozen stock holdings, gained 23.1% in the quarter. Manager James McCall has bet successfully on fiber-optic and networking stocks.

At the other end of the performance spectrum, most foreign-stock funds posted hefty losses for the quarter and now are down year-to-date. Asian markets have been slammed by economic, political and interest-rate concerns. Europe, meanwhile, is a victim of its weak euro currency.

But some foreign funds are doing much better, including Merrill Lynch Global Small Cap, whose three-year annualized return of 30.3% earned it five stars from Morningstar, and several funds that still heed traditional valuation measures, such as Tweedy Browne Global Value and Merrill Lynch Global Value.

The third-quarter domestic losers list is littered with Internet and telecom funds, including several from well-known tech managers.

Talk about bad timing: Ryan Jacob, who made his name as the wunderkind manager of the Internet Fund, decided to hang out his own virtual shingle this year--becoming, as one fund analyst put it, the poster boy for the Internet crash. The first-year performance chart for Jacob Internet looks like a backward slash: The fund has dropped by more than half.

That kind of performance will test one’s patience, but several recent contributors to Morningstar’s Web message board said they see the fund as a long-term bargain, echoing the value investors of the ‘90s. As one poster put it (perhaps ungrammatically, but you get the idea): “Hang it with now!!!”

Some have found it a tad harder to keep calm. Another contributor’s posting pleaded: “My God, somebody give me advice!!!!”

Manager Kevin Landis, meantime, has amassed the top five-year record in Morningstar’s universe at his flagship Firsthand Technology Value fund, but his new, more narrowly focused Firsthand E-Commerce fund has taken investors on a wild ride.

Firsthand E-Commerce, which was launched Sept. 30, 1999, soared 48.6% in its debut quarter. But it has cooled considerably, sliding 15.7% in the third quarter. Despite its name, the fund avoids the online retailers, such as Amazon.com, but some of its software and Net infrastructure holdings have gotten clipped.

The fund’s Morningstar board has been quiet for months now. In this market, some former fund stars are leaving investors with very little to talk about--online, at cocktail parties or elsewhere.