Rally Lifts Equity Funds
After a brutal year, the stock market’s rally of the last month has given equity mutual funds a healthy lift.
The market’s gains boosted every one of the 36 domestic and foreign equity fund categories tracked by Lipper Inc., which tallied results for funds as of Thursday.
Major stock market indexes, including the Nasdaq composite and the Standard & Poor’s 500, hit two-year lows April 4 and have rebounded steadily since. The catalyst, analysts say, is growing investor belief that the economy will begin to turn around by year’s end.
Though the rally has been broad-based, some market sectors have been hotter than others--as Lipper’s fund-category returns show for the four weeks through Thursday:
* Beaten-down “growth” stock funds have grabbed the momentum from “value” funds--at least for now.
And within the growth sector, deeply depressed technology and telecom funds have led the way. The average tech-sector stock fund soared 26% in the period.
* Funds that favor large-capitalization stocks--so dominant in the late 1990s--have continued to lag behind their small-cap counterparts.
Small-cap growth funds gained 15.1% in the rally, on average, and mid-cap growth funds rose 15.6%. By contrast, the average large-cap growth fund rose 11.8%.
Likewise, in the value category, returns on small-cap and mid-cap value funds have outpaced large-cap value funds.
* The average general domestic stock fund rallied 10% in the four weeks, cutting its year-to-date loss to about 6%, Lipper said.
* Foreign stock funds have generally lagged U.S. funds’ gains, but Japanese stock funds have been hot, rising 9.3%, on average, in the period. The funds were helped in part by the yen’s rebound against the dollar.
Fund managers and analysts offer contrasting views on whether the market rally in general can continue--and which sectors will lead if it does.
“When the economy does recover, growth stocks are where the earnings will come back the fastest and expand the most,” said manager John Wallace, whose small-cap RS Diversified Growth fund has gained about 15% in the last month.
Growth funds invest in companies expected to have the strongest earnings prospects, while value funds focus on firms selling at low share prices relative to fundamentals such as earnings, cash flow or book value.
Growth stocks--especially tech issues--have been hammered over the last year as corporate earnings in general have tumbled. The average large-cap growth stock fund still is down 24.6% from a year ago.
By contrast, the average large-cap value fund has gained 4.4% in the last year. Small- and mid-cap value funds have been even hotter.
Some analysts still see value as the market’s “sweet spot,” noting that economic uncertainty continues to hang over the tech sector.
“I’d still tend to favor value funds. This bounce is probably just that, a bounce,” said Ron Rowland, editor of All Star Fund Trader, an Austin, Texas-based newsletter focused on sector rotation.
“Nasdaq has been in a bear market for a year and this is the latest bounce of roughly 20% or more,” Rowland said. “The earlier ones didn’t take. Maybe this is the real thing, but I’m not convinced.”
For now, many of the most aggressive and risky growth funds are riding strong rebounds.
Van Wagoner Emerging Growth and several of its siblings gained more than 50% in four weeks, for example, though investors who have bought shares in the last year or so could still be sitting on big losses.
The math can get daunting for any beaten-down stock or fund: In an extreme case, if an investment loses 99% and then doubles, the price still is down 98%.
Despite the strong recent performance of tech and telecom funds, those categories remained down 20.6% and 15.5% year-to-date, respectively--and far more in the trailing 12 months.
While several Internet sector funds already have bitten the dust, some of the survivors are showing their first signs of life in more than a year. ProFunds Internet, for instance, rocketed 72.1% in the month, and Jacob Internet soared 48.5%.
“We’ve felt much more positive since the Fed began aggressively cutting interest rates, said Ryan Jacob, manager of Jacob Internet. “It’s just a matter of time before the economy gets back on its feet.”
Jacob’s fund had positive net cash flows in April of “several million” dollars, its best month in a year, he said.
The fund has tried to shift from some of the most speculative “dot-com” companies and emphasize those with financial strength or even--yes--profitability.
Jacob said, for example, that he has upped his stakes in the profitable Internet security software companies Check Point Software Technologies (ticker symbol: CHKP), Netegrity (NETE) and Internet Security Systems (ISSX).
Noting the severity of the Nasdaq sell-off earlier this year and the possibility of an economic recovery later in the year if the Federal Reserve’s rate-cutting medicine takes hold, Jacob said tech stocks could be poised to benefit from a “double combination”: rising earnings and expanding price-to-earnings multiples on those earnings.
“Many tech companies are still trading at levels that don’t anticipate much earnings power at all,” he said.
Still, even some growth fund
managers remain cautious about the prospects for tech stocks.
“This is a bounce following very oversold conditions, and we’re now at levels where you can make the case that tech is expensive again,” said Peter Trapp, whose technology-heavy Needham Growth fund has stood up well to the bear market, gaining 7% in 2000 and 15% so far this year.
“June earnings reports are going to be weak. September reports are going to be weak. We probably won’t see improvement until the fourth quarter at best,” he said. “The Fed is pushing a wet noodle right now.”
Trapp said he is holding about 20% of assets in cash and “adding to our short positions as we speak.” In a short sale, an investor benefits if the targeted stock goes down in price.
When the economy perks up again, the admittedly biased Wallace of RS Diversified Growth expects smaller stocks to continue to benefit at the expense of blue chips.
“Everyone expects the Fed to continue cutting rates until the economy kicks into gear,” Wallace said. “That makes small-cap especially attractive because those companies are more sensitive to prevailing economic conditions.”
He noted that small-cap stocks paced the market rallies as the economy recovered in the early 1980s and again in the early ‘90s. “I don’t think history will be any different this time,” he said.
Still, like Trapp, Wallace said current valuations remain a prime concern in the tech area. He said his “eclectic” portfolio includes several energy stocks as well as a “basket” of construction-related names such as Jacobs Engineering (JEC) and Oregon Steel (OS).
“The nation’s infrastructure, both public and private, is old,” he said. “The average electric utility plant, for example, is 20 years old.”
Meanwhile, though the Japanese market has seen many promising rallies sputter out over the last 10 years, at least one analyst said he recently has begun investing new money there.
“It really looks like Japan may have turned the corner this time,” Rowland said. “The new prime minister is shaking things up. I mean, he even put a woman in the Cabinet, which had been unheard of. They finally seem to have a real reformer.”
The Nikkei-225 stock index has rebounded 21% since mid-March. Still, the average Japanese stock fund is down 31.2% from a year ago.
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Leaders, Laggards in Market Rally
The stock market rally of the last month lifted every stock mutual fund category tracked by Lipper Inc., but the leaders have been growth-oriented fund sectors and funds that target small- and mid-size stocks.
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Four week gains, through Thursday:
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Leading fund sectors
Tech: +26.0%
Telecom: +18.9%
Mid-cap growth: +15.6%
Small-cap growth: +15.1%
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Lagging fund sectors
Large-cap value: +6.1%
Intl.: +5.9%
European: +4.3%
Real estate: +2.4%
Source: Lipper Inc.
How the Biggest Funds Fared
Here are the 20 largest stock mutual funds and their total returns through Thursday for the previous four weeks, the year to date and the previous 12 months.
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----Total return--- Assets Four 12 Fund (billions) weeks YTD mos. Fidelity Magellan $80.2 +9.5% -4.7% -11.2% Vanguard 500 Index 74.8 +8.5 -5.1 -10.4 American: Inv. Co. of Amer. 53.0 +5.4 -1.0 +2.3 American: Washington Mut. 46.4 +3.9 +2.4 +13.8 Fidelity Growth & Income 34.9 +6.0 -6.1 -3.9 Fidelity Contrafund 33.8 +4.3 -9.9 -13.0 American: Growth Fund 32.8 +11.8 -5.3 -7.6 Janus Fund 31.3 +16.2 -6.6 -21.6 American: EuroPacific 29.0 +6.0 -2.3 -17.6 American: New Perspect. 28.8 +7.5 -0.5 -10.4 America Century Ultra 27.3 +11.2 -9.8 -24.5 Janus Worldwide 25.9 +10.8 -8.9 -26.1 Vanguard Windsor II 24.9 +5.0 +1.4 +19.1 Vanguard Wellington 22.9 +2.5 +2.7 +15.0 Fidelity Blue Chip 22.2 +10.4 -8.7 -16.3 Fidelity Growth 21.7 +13.7 -18.3 -26.0 Fidelity Equity Income 21.5 +5.8 -0.9 +11.5 Fidelity Puritan 20.3 +4.2 +0.2 +9.9 Putnam Growth & Income 19.3 +5.4 -0.5 +11.8 Vanguard Primecap 19.1 +7.0 -5.0 -13.6
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Source: Lipper Inc.
Stock Fund Returns, by Category
Here’s a look at average returns for key categories of stock mutual funds in the four weeks ended Thursday, as well as returns for three other periods also through Thursday. The four weeks saw a broad-based rally on Wall Street that lifted every major category of stock funds. But most fund categories still are down year to date and for the last 12 months.
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General Stock Fund Categories
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-Total investment return, through Thurs.- Four 12 Two Category weeks YTD months years* Mid-cap growth +15.6% -13.2% -22.0% +12.0% Small-cap growth +15.1 -9.1 -16.7 +14.1 Multi-cap growth +14.6 -14.4 -25.1 +3.3 Large-cap growth +11.8 -12.8 -24.6 -3.5 Mid-cap core +10.3 -2.9 +2.0 +14.4 Small-cap core +10.0 +2.2 +6.7 +14.7 Multi-cap core + 8.8 -5.6 -8.9 +3.1 Large-cap core + 8.3 -6.5 -11.2 -2.1 Small-cap value + 7.3 +7.3 +23.6 +16.0 Mid-cap value + 6.7 +4.3 +20.0 +12.1 Multi-cap value + 6.2 +0.7 +10.9 +4.5 Large-cap value + 6.1 -1.8 +4.4 +0.6 Equity income + 5.1 -1.8 +7.6 +0.7 S&P; 500 index funds + 8.4 -5.3 -10.9 -2.9 Avg. genl. stock fund +10.1 -5.9 -7.1 +4.6
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Sector Fund Categories
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-Total investment return, through Thurs.- Four 12 Two Category weeks YTD months years* Technology +26.0 -20.6 -46.3 +2.2 Telecommun. +18.9 -15.5 -43.2 -6.9 Gold-oriented +10.3 +8.8 +4.0 -6.8 Health/biotech +8.6 -17.4 +8.4 +24.0 Natural resources +6.2 +1.1 +16.9 +14.8 Financial services +5.2 -3.8 +28.9 +4.3 Specialty/misc. +4.6 -2.2 +1.7 +1.6 Utilities +4.4 -3.5 +2.8 +7.0 Real estate +2.4 +0.8 +15.5 +8.2
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Foreign Fund Categories
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-Total investment return, through Thurs.- Four 12 Two Category weeks YTD months years* Japanese +9.3 +2.9 -31.2 +3.9 Emerging markets +8.9 -0.3 -23.5 -0.6 International +5.9 -8.5 -17.8 +0.9 European region +4.3 -12.5 -17.8 +0.9
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* Average annualized return for two-year period
Source: Lipper Inc.
