‘Like’ Thinking Might Be Red Flag For Fund Investor

Great minds think alike. Perhaps that explains why Intel, General Electric, Philip Morris, Cisco Systems and Microsoft pop up over and over again in mutual fund portfolios.

Then again, perhaps it’s simply a matter of “like” minds.

“There is a bit of a herd mentality in mutual funds,” noted Derek A. Sasveld, a senior consultant with Ibbotson Associates, a market research firm in Chicago.

A recent survey by the fund researchers at Morningstar Inc. of its data base of 2,063 domestic stock funds - excluding index, specialty and other nondiversified funds - found that almost 40 percent own Intel, about a third own General Electric and another third Philip Morris.

These top three holdings are the same ones found in a search of the data base about two years ago, though Intel has jumped from third place to first. Each also appears in far more funds this time around. This suggests that stock funds are looking more alike than ever - something that may give pause to investors who own multiple funds.

Rounding out the top five in the latest survey are Cisco and Microsoft, appearing in 32 percent and 29 percent, respectively, of the fund portfolios.

Intriguing though the numbers may be, the fact is that companies with big market capitalizations and many shares were most popular again. And why not? These stocks that have been on a roll for the last couple of years, and most small-cap stocks don’t have enough shares to attract hundreds of funds.

For individual investors, paying attention to the popularity of certain stocks has some practical use. But it’s worth remembering that the portfolio information for specific funds may be months old, because funds must report their holdings only twice a year.

“The list is useful to insure that you don’t have too much overlap,” said James R. Raker, a senior research analyst with Morningstar. “Say I own Intel stock and own a couple of growth funds. When I see that Intel is owned by all these funds, it raises a red flag.”

Select S&P return attractive

Here’s a variation on the ever-popular Dow 10 strategy of buying stocks with high dividend yields. This one uses the Standard & Poor’s 500 (with adjustments such as eliminating utilities) as its base for picking 15 stocks. Since 1976, the system, called the Select S&P Industrial Portfolio, has returned an average of 19 percent a year.

Several firms are selling the stocks as a unit trust. The stocks: UST, Alltel, SBC Communications, International Flavors & Fragrances, General Mills, WinnDixie Stores, Genuine Parts, Royal Dutch Petroleum, H.J. Heinz, American Home Products, May Department Stores, Bristol Meyers Squibb, Pitney Bowes, Kellogg and Anheuser-Busch.