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Safer funds again outshine glamour fare for Vanguard's chief

A year ago John Bogle was pondering the eternal question in his industry: What kind of mutual fund does the public want? That was late 1983, at the crest of a wave of interest in high-tech, bio-tech , and health-service stocks. In jest, said the president of the Vanguard Group of Valley Forge, Pa., the ideal name for a mutual fund would have to be the ''Medical-Science Technology, Electronic Data-Processing, Bio-Genetic Fund.''

But going into '84, he warned, such a fund would be in trouble. The stock market was too speculative. A deep ''correction'' was settling in. Stay conservative, he counseled.

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He was right. As the dust settled this year - especially the dust in the speculative corner of the stock market - it turned out that growth, capital-appreciation, and small-company mutual funds, based on those once-darling high-tech stocks, had sagged greatly.

Conservative funds (equity-income and growth-and-income, in mutual fund parlance) did much better, though not even these were wonderful performers. Fixed-income funds, based on interest-bearing securities, held up well, too, as long as they were not oriented toward gold, energy, international investments, or options.

That was 1984.

Going into 1985, Mr. Bogle thinks conservative equity and fixed-income funds will continue to do well. And here's a twist: He also thinks those speculative equity funds may have merit today.

Vanguard began two such speculative funds late this year. Why? Noting the decline in the prices of tech-type stocks, Bogle sensed a good buy. Price-to-earnings ratios of many high-tech and smaller-capitalization stocks indicate there will have to be ''some upward revaluation'' of these stocks at some point.

Overall, he says, the 1985 economy will continue to ''favor conservative stocks, but other types of stocks are relatively cheap.''

Bogle's forecast jibes with economic forecasts for 1985. These, basically, see an environment in which funds that did well in '84 will continue to do well. Most economists predict the economy will be poking along next year without either recession or torrid growth. The government will still be borrowing heavily; inflation will remain under control; it will be a start-and-stop stock market; and - most significantly, perhaps - interest rates will be level or perhaps down slightly.

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If you take that outlook seriously, there are certain elements around which you might select mutual funds:

* Given the probable continuation of high real (inflation-adjusted) interest rates in '85, the ubiquitous money-market mutual fund should remain popular. It is quite common for investors to use a money-market fund for short-term investing oriented to interest rates.

* An adventurous investor might find Bogle's speculative strategy profitable. If a mutual fund is supposed to be a long-term investment, then low stock prices today present a good ''dollar-cost averaging'' opportunity for an equity fund. A few years up the road, those stocks could be performing well - and you'd have bought into them early, spreading your risk via a mutual fund.

* For a conservative tolerance, you probably won't go wrong with the equity-income and growth-and-income categories again, although it would be wise to monitor tax-law changes in 1985 to make sure that the advantages of, say, a municipal bond fund do not get altered.

There are the big equity growth and growth/income funds that most people know - Fidelity Magellan, Vanguard Windsor, etc. - and there also appear to be opportunities in income funds, especially long-term government securities funds.

Since you've heard Mr. Bogle's pitch and you probably have some experience of money-market mutual funds (or their banking kin, money-market deposit accounts), let's examine government-securities funds as an option for '85. These look good if you think interest rates will continue weakening; for if so, that would bolster bond prices, on which these funds are based.

The government issues securities (bonds) when it borrows; these are promises to pay back the loans with interest. And the federal government is probably the safest credit risk on the planet. That formula has made government securities funds one of the hottest investments around. Billions have flowed into these funds during the past year. Merrill Lynch's Federal Securities Trust took in $1. 2 billion in its introductory phase, more than any other mutual fund in such a short period.

Government-securities funds are based on US Treasury bills, notes, and bonds and other federal debt instruments. Some, such as those of the Government National Mortgage Association (Ginnie Mae) and the Federal Housing Administration, have the ''full faith and credit'' of the government behind them; others have less absolute guarantees but are still considered extremely creditworthy.

These securities, because of their safety, pay good but not great interest rates. To increase yield, says portfolio manager Michael D. Burke of Houston-based American Capital Government Securities Inc., some funds use hedging devices called ''covered call options.''

These lock in high interest rates and enable the fund to increase returns by adding in the interest that is paid on the bond ''calls'' it sells. A call gives the holder the right to buy a bond from the mutual fund at a stated price for a certain period. The holder of the call pays a 5 to 7 percent premium to the mutual fund while sitting on the call. That, then, is added to the fund.

American Capital's government securities fund, which is sold through stockbrokers, began July 16 and its assets streaked to $554 million by late November. ''It's a very easy sale,'' Mr. Burke says.

David D. Grayson, president of First Investors Corporation, which operates a securities fund invested in Ginnie Maes, does not use the hedging strategy. But he notes that ''the combination of high yields and guarantees by the US government make these funds extremely appealing.'' With as little as $1,000 (even less for other funds), an investor can buy a piece of a $25,000 Ginnie Mae via the fund.

There are drawbacks to government securities funds. Money-market funds invest in short-term government securities and stay pretty steady, but long-term government bonds rise and fall. Thus a shareholder who needs to bail out at the wrong time could lose some principal.

If interest rates fall, Mr. Grayson notes, government securities funds do well; and even if interest rates rise, he says, the ''dollar-cost averaging'' technique of buying more shares at a cheaper price can be used if you are staying in the fund. These funds usually carry a charge of 4 to 8 percent up front. That can make an investor commit for the long term.

Grayson admits this is a drawback, but he contends that, except for money-market funds, most mutual funds attract long-term investors anyway, who ''will ride with a mutual fund with or without a sales charge.''

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