As the clock ticks away on a rough-and-tumble 1994, the investment concerns linger on.

Try this multiple-choice quiz about unsettling recent events:1. The bankruptcy and bond default of Orange County, Calif., after its now-departed treasurer lost a potential $1.5 billion by betting on derivative securities, means:

You can't trust the $1 trillion municipal bond market any farther than you can throw it. Quality standards for bonds will be tightened by investment firms and mutual funds, which will also diversify their portfolios more. Investment end times are near.

2. A $2.4 billion accounting error by Fidelity Investments on its Magellan Fund, resulting in no year-end distribution to shareholders instead of a promised $4.32 per share, indicates:

Magellan has gotten so big at $36 billion in assets nobody can keep track of it anymore. Fidelity likely threw a fit at whichever employee made the mistake and will start having these crucial figures monitored more regularly. Lackluster Magellan returns in 1994 signal the demise of the fund industry.

3. The Securities and Exchange Commission's $100,000 disciplinary action against firms run by mutual fund manager Mario Gabelli, in citing a need to prevent potential misuse of inside information, points out:

(A) As we have always suspected, everyone except us knows what's really going on. (B) The SEC, while not charging that Gabelli used information from his separate positions at his mutual funds and manufacturing company to make trades, is letting the industry know it must impose tougher compliance guidelines with third-party review. (C) The SEC has inside information that end times are approaching.

As astute readers have by now deduced, the correct answer to all three questions is (C). Those wise-guy (A) and doomsday (B) responses are incorrect.

Regarding Orange County, all investment managers will be assessing credit quality beyond traditional rating agency assessments, which had given high ratings to that county's debt. Expect more diversity in municipal bond portfolios, especially single-state bond funds.

"Municipal bond funds will liquidate positions and upgrade portfolios, making sure not to overly emphasize any holdings," said Norman Fosback, president of the Institute for Econometric Research, Ft. Lauderdale, Fla., which publishes investment newsletters and the new Mutual Funds Magazine.

Municipal bonds remain an important vehicle.

"If anything, this problem may increase the viability of diversified mutual bond funds over simply buying municipal bonds individually," added Eric Kobren, executive editor of the Fidelity Insight newsletter, Wellesley, Mass. "This also shows credit rating is as important as interest-rate sensitivity."

A. Michael Lipper, president of Lipper Analytical Services, predicts managers "will be researching much deeper" than in the past.

"It has a lot of investors nervous, but direct impact is only likely to be on a relatively small number of national municipal bond funds with California holdings," noted Stephen Savage, editor of the

Value Line Mutual Fund Survey and monthly No Load Fund Advisor newsletter.

Magellan's accounting gaffe is surprising in light of Fidelity's sophisticated computers. This manual error supposedly wasn't caught because such numbers aren't shown to the manager, so he can concentrate on investing rather than administrative duties.

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"I wouldn't be surprised to see Fidelity change procedures, for any manager would know immediately whether distribution amounts are off-base," said Kobren, who believes Fidelity should be more forthcoming with distribution estimates anyway. "It actually was an error that's to the interest of shareholders, who'd likely prefer to avoid a capital gain, and it won't have negative financial consequences."

Magellan manager Jeff Vinik, who posted a 24.7 percent gain in 1993, is down a little vs. the 1994 market, but Kobren still gives him high marks because it is, after all, an aggressive growth fund. Despite criticism that the portfolio is riskier with big bets on industries and companies, Kobren believes it's monitored adequately.

The Gabelli disciplinary action didn't charge insider trading, but fired a warning shot to all funds.

"Procedures didn't adequately address the fact Mr. Gabelli, as chief executive of a public company, would come into possession of material of a nonpublic nature," said Colleen Mahoney, deputy director in SEC enforcement. "This is something broker dealer firms and investment advisory firms must be concerned about."

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