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By Michael Trimarchi
Washington Post Staff Writer
Sunday, October 4, 1998; Page H4

If mutual fund investors weren't dizzy by the middle of the third quarter, their heads surely were spinning at the end.

Stock mutual funds fell an average of about 15 percent in July, August and September, with nearly all types of equity funds turning in a losing performance, said Lipper Analytical Services Inc., which tracks the performance of mutual funds. The results, which included many double-digit losses, were the worst since the third quarter of 1990.

"In our outlook last quarter end, we stated that we looked for continued deceleration for general equity fund performance and cautioned that some investors' equity allocation might have been too high," Lipper said. "Our cautions proved valid after July 17, when the Dow Jones industrial average turned steadily downward. After achieving strong performance in the first seven-plus months of the year, virtually all domestic equity funds are currently in negative territory for the year to date."

The Dow industrials fell 12.4 percent, or 1,495 points, in the quarter, to 7842.62. It was the Dow's worst performance since the third quarter of 1990, when it lost 15 percent. From its peak of 9337.97 on July 17, the Dow was down 16 percent.

The results weren't much better among other market measures. The Standard & Poor's 500-stock index, which also reached a high on July 17, fell 10.3 percent in the quarter. The Nasdaq composite index, home to many high-tech companies, fell 10.6 percent. The Russell 2000 small-stocks index fell 20.5 percent.

Small-company and micro-cap mutual funds, which were down about 4 percent in the second quarter, each were off about 21 percent in the quarter ended Wednesday, Lipper said.

The sector funds category was down about 11 percent. Especially hard hit were financial services funds, which fell nearly 20 percent as U.S. banks faced problems with loans to companies in Latin American and Russia and to hedge funds. By comparison, utility funds were down about 1.4 percent.

Among world equity funds, the biggest sell-offs occurred in Latin America funds, which fell almost 30 percent. Funds investing in emerging markets and in Canada were down about 23 percent each. European funds were off about 17 percent.

Gold-oriented funds, proving their worth in times of global economic turmoil, were the only sector that was up in the quarter, at about 4 percent.

There were a few individual winners among diversified funds in the quarter. The Prudent Bear Fund, based in Dallas, was up 21.9 percent. The fund's goal is to seek capital appreciation in a declining market. The Bethesda-based Profunds UltraBear Fund, which seeks to provide "investment returns that are twice the inverse performance of the S&P 500 index," also notched a double-digit return, at 17.9 percent. ProFunds' Bear Fund was up, too, at 11.1 percent.

Investors, many of whom were unprepared for July's slide, withdrew a net $11.2 billion from stock mutual funds in August, said the Investment Company Institute, a Washington-based trade group for the mutual fund industry. It was the first time that stock funds had a net outflow of cash since $520 million was withdrawn in September 1990.

The previous record outflow occurred in October 1987, when $7.48 billion was withdrawn from stock mutual funds in response to the Dow's 508-point drop on Oct. 17.