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By Jerry Knight
Washington Post Staff Writer
Sunday, October 4, 1998; Page H5

The three mutual funds that invest in Washington area stocks lost money in the third quarter, but they lost less money than the average regional stock.

The Growth Fund of Washington, which has made investors an average of almost 16 percent a year during the past five years, lost 11.6 percent during the quarter.

Losses were larger at two younger funds that concentrate on regional securities, with the Monument Washington Regional Growth Fund down 14.23 percent for the quarter and the Monument Washington Regional Aggressive Growth Fund off 13.22 percent.

All three funds outperformed the Washington Post-Bloomberg regional stock index. The index fell 16.4 percent between June 30 and Sept. 30. The regional index represents the price of the average stock, or the results an investor would get by buying one share of each of the 238 stocks included in the index.

Like the regional index, the local stock funds began the quarter with gains, took big hits in late July and early August, and have struggled since to regain a little ground.

"In the middle of the quarter we just saw indiscriminate selling and rampant flight to safety," said David A. Kugler, president of the Monument Funds Group in Laurel, which launched its two regional funds in January.

For its first nine months in business, Monument's aggressive growth fund, which invests in stocks of smaller companies, is up a little over 2 percent. Monument's growth fund, which buys stakes in bigger companies, is down 1.8 percent.

The Growth Fund of Washington, which has been specializing in regional stocks since 1985, is still showing gains for the year, but is up just 1.5 percent.

While the three regional stock funds seek to capitalize on the strengths of companies in the economically robust mid-Atlantic region, it was world economic events that determined their third-quarter performance, Kug ler said.

"We saw some unwarranted selling because of the overseas situation," he said, citing regional bank stocks as an example. While the New York banks and some of the multi-regional banks have suffered foreign loan losses that drove their stocks down, other banks' stocks dropped even though their operations are largely regional and almost entirely domestic.

Stocks of First Union Corp. of Charlotte, First Virginia Banks of Falls Church and Provident Bankshares of Baltimore all took hits, Kug ler said: "They don't have much exposure, if any, to what's going on in Asia or Russia. There's no economic sense to it."

Shares of Crestar Financial, one of the biggest holdings of the Growth Fund of Washington, managed to buck the banking trend, climbing $2.50 a share to $56.75 during the quarter.

The fund's manager, Prabha S. Carpenter, also scored gains on the two biggest stocks in her portfolio, Fannie Mae Inc. – which climbed almost 6 percent, from $60.75 to $64.25 – and Freddie Mac, which was up a comparable amount, from $47.12½ to $49.52½.

The two big government-chartered mortgage finance companies benefited from a "flight to quality" that saw investors bail out of small companies in favor of big companies with reliable earnings.

The flip side of that trend, Kug ler said, is that investors fled many small technology companies, especially those that had problems, such as Ciena Corp. and Manugistics Inc.

The shift to big stocks made the already volatile small-cap stocks behave even more erratically, which in turn drove away still more investors, further battering small stocks.

Significant as the losses were for regional funds, investors who held those diversified baskets of stocks generally did better than people with holdings in individual companies. "If you're the [chief technology officer] of a little tech company in Tysons Corner, it's painful," Kug ler said. "Your net worth is way down."