Trends of 2000 May Stick With Investors

Mutual fund investors may be thrilled that the Federal Reserve has begun to cut interest rates, but when they see their funds’ year-end statements, many will wonder what took the Fed so long.

As technology stocks plummeted amid a weakening economy, the average domestic stock fund sank 8% in the fourth quarter, according to fund tracker Morningstar Inc.

That was the worst loss since the third quarter of 1998.

For the average tech-sector fund, the fourth-quarter loss was a stunning 36%.

For the year, the average domestic fund posted a modest 1.9% decline, but that is misleading: The figure is skewed by the hefty gains last year in fund sectors where people have relatively few dollars invested, including natural resources funds and financial services funds.

Real-estate-related funds had a terrific year, up 26.2% on average, as real estate investment trust shares returned to favor. But real estate funds hold just $11 billion in assets, according to fund tracker Lipper Inc.

By contrast, investors’ favorite funds--those that target growth stocks--suffered steep losses in 2000. The average large-cap growth fund fell 14.1% for the year, Morningstar data show. Those funds hold nearly $440 billion of investors’ money.

Of course, last week’s growth-stock rally on the heels of the Fed rate cut may have helped recover some of what fund owners surrendered in 2000, though by Friday, stocks were in retreat again.

In any case, many investors may not soon forget the trends that dominated stock fund performance last year. Among them:

* Chasing the previous year’s winners didn’t pay--in most cases. Though its turnaround was extreme, the Nicholas-Applegate Global Technology fund exemplified how dramatically things can change when market dynamics shift. Global Tech, which returned 494% in 1999--one of the best performances ever by a stock fund--slumped 36.4% in 2000.

Ryan Jacob was hailed as a wunderkind when he rang up huge returns at the Internet Fund in 1999, but his Jacob Internet had a miserable debut in 2000, losing 79.1%.

Likewise, international stock funds had a spectacular 1999, soaring 49.6% on average, nearly twice the gain of the average U.S. stock fund. In 2000, most foreign funds were slammed by falling overseas markets and the strong dollar. The average international fund’s decline in 2000: 17.8%, according to Morningstar.

Among major fund families, Janus Capital suffered one of the most severe turnabouts. Janus Mercury fund, which zoomed 96% in 1999, sank 22.8% last year; Janus Overseas, which soared 86% in 1999, lost 18.6%; and Janus Venture, which climbed 141% in 1999, plummeted 45.8%.

The family’s growth-stock bent and penchant for overlapping holdings had a domino effect, which by the fourth quarter triggered net cash outflows from many of the funds as investors fled.

Sometimes, of course, strong performance persists. Schroder Micro-Cap, managed by Ira L. Unschuld, rocketed 147.7% in 2000 after gains of 95% in 1999 and 63% in 1998. Unschuld slashed his tech stock stake last year and loaded up on financial and health-care stocks, Morningstar analysts noted.

* “Deep-value” funds made a big comeback. Martin Whitman’s small-cap Third Avenue Value fund gained 20.8% in 2000 after beating most peers, but badly lagged the Standard & Poor’s 500 stock index in recent years.

As investors looked for “safer” stocks amid the tech sector’s crash, the average small-cap value fund rose 17% in 2000, while the average large-cap value fund gained 5.6%.

Among large-cap value funds, Clipper and UAM Clipper Focus, both slightly in the red for 1999, returned 37.4% and 44.3% in 2000, respectively, as the management team headed by James Gipson and Michael Sandler scored with holdings such as Fannie Mae, Freddie Mac and Philip Morris.

The trend was the same overseas: Foreign funds with a value slant, such as Tweedy Browne Global Value, Oakmark International and Longleaf Partners International, fared much better than the typical fund.

But investors who now realize they shouldn’t have chased growth-stock funds after 1999 ended may naturally wonder whether the value funds and other top performers of 2000 should be avoided today.

Indeed, health-care funds, the biggest winners last year (with a 55.2% average gain), were battered last week as investors took profits in drug stocks. Another group of big 2000 winners, utility stock funds, also tumbled last week.

Whitman, though, insists that his strategy of buying stocks at ultra-cheap valuations will continue to succeed long term.

“I just put a lot more of my own money into the fund,” he said.

* Some star stock-pickers proved their mettle again. Kevin Landis’ Firsthand Technology Value Fund, which has the top five-year return of any fund and leaped 190% in 1999, lost 10% in 2000, far less than most of its tech peers.

The tech-heavy White Oak Growth Stock fund, which gained 50% in 1999 and 40% in 1998, also held up relatively well in 2000, gaining 3.6%, as veteran manager James Oelschlager’s heavy bets in the financial and health-care sectors cushioned the ride.

At Vanguard Primecap, which gained 41% in 1999 and 25% the year before, the Howard Schow-Theo Kolokotrones team had another strong year as the large-cap blend fund rose 4.5% and beat its average peer by nearly 12 percentage points. The same team had a solid year at Vanguard Capital Opportunity, which gained 18%.

And at Legg Mason Value, Bill Miller ran his streak of beating the S&P; 500 index to 10 years--though it wasn’t pretty. His fund lost 7.1% (its first down year in a decade), but that was less than the S&P;’s 9.1% drop.