The investment medium to own in the first quarter turned out to be the one with the message: communications industry mutual funds.
In a great quarter overall for the U.S. market, communications funds scored best of major stock fund categories, with an average total return of 21.5% through Friday, according to fund tracker Morningstar Inc.
Buoyed by strength in stocks in several industries in the sector--including telephone companies such as Ameritech, Internet-access firms such as Yahoo and entertainment giants such as Time Warner--the sector added to its 26.2% average gain in 1997.
Among the funds in the communications category are Flag Investors Telephone Income, up 22.8% in the quarter, and Gabelli Global Communications, up 20%.
While most investors obviously weren't fortunate enough to pick a communications fund late last year, the first quarter still provided plenty of decent returns for stock fund owners.
The average domestic stock fund gained 10.4% in the quarter through Friday, Morningstar said. Once again, that lagged the total return on the blue-chip Standard & Poor's 500 index, which was about 13.3% in the period.
With most smaller stocks taking a back seat to blue chips--the ongoing trend of the last four years--the many mutual funds that include smaller issues in their portfolios dragged down the fund industry average return. Still, investors could hardly complain:
* Foreign funds were standouts, mostly thanks to huge gains in European markets. The average European fund was up 19.8% through Friday, and the average foreign fund was up 16.2%.
* Technology funds gained 14.9% in the quarter, albeit with their usual extreme volatility.
* Among general U.S. fund categories, funds that favor large growth stocks scored best, with a 14% gain through Friday. Large growth stocks include such multinational names as Coca-Cola and General Electric, both of which scored record highs on Monday.
Despite soaring price-to-earnings multiples on those stocks, many investors won't give them up, in part because they have been the market's leaders for so long.
* Funds that target mid-cap growth stocks also came on strong in the quarter, posting a 12.4% average return.
* The small-growth-stock category, meanwhile, continued to lag its large- and mid-cap peers. Still, the small-growth fund group, up 10.1% on average, outpaced the small-value fund group, up 9%.
Value stocks generally sell for lower price-to-earnings multiples than growth stocks, and tend to be perceived as less volatile stocks.
Last year, the small-value category rose 27.8%, versus 14.4% for small-growth, as the Asian crisis frightened many investors out of higher-risk small growth stocks.
Could small-growth's edge over value in the first quarter indicate that investors are becoming more comfortable with the group again? Some analysts say it would be about time: As a story on page D5 today notes, many Wall Streeters say the struggle some large growth companies are expected to have posting decent earnings growth could finally spark a renaissance in smaller growth stocks.
The quarter's laggard funds? Asian funds, not surprisingly. Also, natural resources funds were hurt by the plunge in oil prices, prior to the price rebound of last week.
Bringing up the rear: funds that own real estate investment trusts. The stocks had served as a safe haven in the fourth quarter, but growing confidence on Wall Street in the first quarter encouraged more investors to trade real estate stocks for other issues.