Best and Worst: Beware overheating: US funds

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AMERICAN funds have had a good run in the 12 months to September - and even investors in the worst performing funds have seen some gain. That may be a reason to avoid the market from now on.

Doing badly over the past year would have been difficult. The S&P index covering America's Top 500 companies rose by more than 52 per cent in dollar terms in the past year. Smaller companies did better still, with a rise of 75 per cent.

Certainly Prolific's American Opportunities did well by putting the bulk of its funds in small technology and financial stocks, with a market capitalisation of under dollars 1bn (pounds 670m).

Right at the bottom of the charts, Thornton American goes for the same area. This time the group picked very small companies, and found some shares difficult to sell. The fund manager has left.

With low interest rates and a recovery in progress, why should people be wary of the US? John Ross, portfolio strategist director at Fidelity, sees signs of overheating.

'Massive sales from mutual funds have helped push up prices,' he said. 'Low interest rates have forced people into the market in search of better returns. When small investors start piling in after a sharp rise in the share prices you need to think twice before investing.'

Whatever happens, picking the right stocks and the right areas remains crucial. Alan Tovey, who runs Prolific's fund at the top of the one- year charts, believes US smaller companies have plenty of growth to come.

'Interest rates are low, and smaller firms are actually taking in staff as giant corporations are shedding people,' he said. 'I can see a sharp rise in earnings before the recovery really takes hold - and it is certainly no mirage. In the long term smaller companies tend to outperform big ones.'

Mike Chadney, who runs the Govett MIS US bear fund, is philosophical about its position towards the bottom of the charts.

'The trust is specifically for people who take a gloomy view of Wall Street's prospects,' he said. 'It will come into its own if and when the market drops sharply. The fund falls just as the S&P index rises, but it is designed for professionals.'

----------------------------------------------------------------- NORTH AMERICAN UNIT TRUSTS ----------------------------------------------------------------- The best pounds 1 Prolific American Opportunities . . . . . . 214.91 2 Gartmore American Emerging Gr . . . . . . . 206.44 3 Schroder US Smaller Co's. . . . . . . . . . 198.15 4 Hypo F&C US Smaller Co's. . . . . . . . . . 196.48 5 Perpetual American Smaller Co's . . . . . . 193.64 The worst 117 Capital House American Growth . . . . . . 132.21 118 Capital House North American Gr . . . . . 127.33 119 City Financial American . . . . . . . . . 124.08 120 Govett MIS US Bear. . . . . . . . . . . . 115.59 121 Thornton American Smaller Co's. . . . . . 103.06 Chart shows the value of pounds 100 invested for one year to 1 September 1993, with income reinvested. ----------------------------------------------------------------- Source: Micropal -----------------------------------------------------------------