Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, April 17, 1995                   TAG: 9504170009
SECTION: MONEY                    PAGE: A-8   EDITION: METRO 
SOURCE: JANE BRYANT QUINN/WASHINGTON POST WRITERS GROUP
DATELINE: NEW YORK                                LENGTH: Medium

DON'T BE MISLED BY BOND FUND NAME

As an example, take closed-end municipal bond funds; closed-end funds are bought and sold like stocks and are listed on stock exchanges. Fifty-five funds have the phrase ``investment grade,'' ``investment quality,'' ``insured'' or ``quality income'' in their name, says analyst Catherine Gillis of Morningstar, which evaluates mutual funds. Only 17 of them have three-year records, which qualifies them for Morningstar ratings. Of those, 16 show higher-than-average risk.

The Institutional Government Income Fund, marketed by the Minneapolis-based brokerage firm Piper Jaffray, plunged nearly 30 percent last year because of its bets on high-risk mortgage derivatives. Derivatives also damaged Paine Webber's safe-sounding Short-Term U.S. Government Fund, which lost 4.4 percent.

Eight lawsuits recently have been filed against the $1.53 billion Alliance North American Government Income Trust, partly because of what plaintiffs call its misleading name. North American lost slightly more than 30 percent of its value last year - turning in the year's worst performance for taxable bond funds. Its biggest problem was Mexico. When the peso crashed, so did the fund.

Speaking as a layman, the legal case against this fund looks weak. But the complaint highlights some risks that investors should look out for.

North American was conceived primarily as a free-trade fund, betting on rising commerce among Canada, Mexico and the United States. Some plaintiffs and their lawyers apparently are geographically challenged; they claim that the fund violated its name by investing too much money in Mexico and Argentina. Mexico was in North America back when I was in school, but ``I live in San Diego,'' explains attorney James Krause of Krause & Kalfayan, ``and we think of Mexico as a world apart.''

Gringo-centrism aside, North American's Argentina holdings demonstrate an important point. When a fund's name highlights a particular type of investment, it has to invest at least 65 percent of its money there, under rules laid down by the Securities and Exchange Commission. But the other 35 percent of your money can go anywhere else the prospectus allows.

To find out about that, however, investors have to read deep into the prospectus. In North American's case, the money goes to Central and South America - so the fund's character is more Latin than casual buyers realize.

Furthermore, the fund changed a rule in midstream - something else investors need to watch for. The 1992 prospectus said the managers wouldn't devote more than 10 percent of fund assets to any one country outside North America. But, in 1993, the prospectus added ``except Argentina,'' where managers could invest up to 25 percent of the shareholders' money - and, unfortunately, Argentinean bonds also had a lousy year. The fund's attorney, Dennis Glazer of Davis Polk & Wardwell in New York, says such changes can be made without the approval of shareholders, as long as the fundamental investment policy remains the same. So you have to keep reading the fund's reports, to be sure you agree with what's going on.

One other object lesson: North American bragged that it bought only bonds issued or guaranteed by various governments and related entities. ``Government guaranteed'' sounds safe in the sales literature. But all it means is that the bonds won't default. The government won't save you if the bond's market value plunges, as happened with the peso bonds. Buying government bonds with borrowed money, as North American and many other bond funds do, increases the investment risk.

Morningstar's Gillis is especially disturbed about Alliance's ACM group of closed-end funds. The conservative-sounding ACM Government Securities Fund puts 35 percent of its money into a global playpen of foreign bonds, emerging-market debt, derivatives and low-grade U.S. corporate debt, she says. ACM Government Opportunity can invest up to 20 percent of its money in common stocks. They're classified in most newspaper listings as government funds, which hides their true character. Morningstar calls them ``multisector bond funds.''

How do you separate the wolves from the goats? Reading the prospectus sometimes helps, but not always. The 1993 prospectus for Paine Webber's Short-Term fund said it had ``no present intention'' of investing in certain types of derivatives. But it bought them anyway and lost a bundle, says Morningstar's Amy Arnott.