NOT A HAPPY STATE: DESPITE OK RETURNS, MOST REGIONAL STOCK FUNDS SCRATCHING: QUESTION, OF COURSE, IS DO THEY MAKE SENSE?

The handful of stock mutual funds that invest their money in one region, or even a single state, have had difficulty raising new cash, even though some sport decent returns.

In May, Monument Funds Group Inc., which has had runaway success with its Internet fund, shuttered the Washington Regional Growth fund and rolled the assets into a new medical sciences portfolio. Then last month the Bethesda, Md.-based company folded the Washington Regional Aggressive Growth fund into its telecommunications fund. Company officials say that because there’s so much growth in the high-tech sector along the Beltway, those funds are still investing in many of the same securities as before. But the new format should now be an easier sell.

“For a little place just starting out, it was better to change into funds that could attract money nationally,” says David Kugler, Monument’s president.

While municipal bond funds focus on single states so local investors can reap tax advantages, the reasons to invest in regional stock funds are less clear. Some dismiss them as a marketing gimmick.

Monument’s retreat from the regional fund business hasn’t stopped other fund companies from plowing forward. Despite lackluster asset gathering, Aquila Group of Funds still has two regional offerings, the $2.5 million Rocky Mountain Equity Fund and the $16 million Cascadia Equity Fund. Officials say they are investment vehicles that make sense.

“Some people take pride in investing in local companies,” says Diana P. Herrmann, president of New York-based Aquila.

local knowledge, local gains

By hiring local portfolio managers who know the companies and their place in the local economy, the funds are able to find investment gems “that are not being followed by Wall Street,” Ms. Herrmann says.

That may be so, but the Cascadia Fund, named for the Cascade Mountains of the Northwest, has 10% of its assets in Microsoft Corp. and Intel Corp., staples of growth funds with national mandates. Those picks helped give the fund a 14.32% return this year through Oct. 29, according to Morningstar Inc., the Chicago fund tracker.

Standard & Poor’s 500 stock index was up 10.16% over the same period.

Even with strong returns, some advisers doubt that these funds make a convincing case to investors. “How many ways can you slice up the same pie?” asks David Morganstern, co-president of Capital Management Consulting of Portland, Ore., which supervises $42 million.

To be fair, some regionally focused funds have managed to attract substantial assets. Franklin California Growth Fund, based in San Mateo, Calif., has close to $1 billion, and its 24.82% return through Sept. 30 puts it on par with some of the highest fliers in the growth area.

Observers say that a fund like Franklin’s has the advantage of focusing on a state with diverse industries and a gross domestic product that rivals many nations’.

Over the summer, the Franklin fund moved into the Internet, a sector it had virtually ignored in its 30% allocation to technology. By investing in some of the high-tech powerhouses located virtually across the street from its Northern California headquarters, Franklin is likely to mirror the returns of other aggressive growth funds.

“A lot of people think that their region is bigger and more vibrant than it is,” says Monument’s Mr. Kugler. In Franklin’s case, though, California provides a diverse investment base, he adds.

Seattle-based Safeco Northwest fund, with $100 million, has also done well by making heavy bets on such high performers as Microsoft, Intel and Costco Cos. Inc., the Issaquah, Wash., bulk retailer. That fund is up 14.33% through Sept. 30, according to Morningstar.

Even with those successes, says Mr. Morganstern, the Oregon adviser, few clients have expressed interest in regional investing. He calls the idea gimmicky, saying that when clients want to express local pride, they buy stock in companies they like.

And, Mr. Morganstern points out, by overweighting market darlings from their home regions, funds do not necessarily represent the breadth of corporations in a particular geographic area.