‘Growth,’ Bigger Stocks Post Modest Losses; ‘Value’ Suffers

The first quarter produced more red ink for most stock mutual fund owners.

There was a wide range in the losses, however. So, for clues to where the market might be headed, analysts are focusing on which fund sectors have held the edge in performance this year.

In general, “growth” stocks -- especially technology issues -- have been a better place to be than “value” stocks. Bigger stocks have been stronger than smaller shares. And the U.S. market has performed better than most foreign markets.

The average domestic stock mutual fund had a negative total return of 3.4% in the first quarter ended March 31, according to fund tracker Morningstar Inc. in Chicago. Total return is price change plus any dividend income.

The first-quarter loss took back a chunk of the average domestic fund’s fourth-quarter gain of 5.8%. The market rebounded sharply in the fourth quarter after reaching five-year lows in mid-October.

Worries about the war with Iraq dominated Wall Street in the first quarter. By mid-March, the average stock fund was down more than 5% from Jan. 1.

But the market started to rally about a week before the war began on March 20, and, despite some pullbacks, it has held on to most of its gains.

Looking under the surface, here’s what stock-fund investors experienced in the first quarter, and what the trends may suggest about the near-term outlook:

* Funds that own growth stocks -- shares of companies whose earnings are expected to grow at an above-average pace over the next few years -- generally recorded smaller losses than value-oriented funds. Value funds tend to focus on companies that are slower-growing but whose shares also may be priced lower relative to underlying earnings.

The average fund that owns large-capitalization growth stocks eased 1.3% in the quarter, after diving 27.7% last year.

By contrast, the average fund that owns large-capitalization value stocks slumped 5.2% in the quarter after losing 18.9% last year, according to Morningstar.

Among funds that own mid-capitalization stocks, the growth sector’s average 1.7% decline in the quarter compared with a 4.9% loss for the value sector.

The better performance of growth stocks reflects some investors’ belief that the economy is poised to pick up later this year, which would be expected to benefit growth firms foremost, said Russel Kinnel, director of fund analysis for Morningstar.

Even if investors figure the economic rebound will be pushed into early 2004, the market is likely to anticipate that by rallying this year, Kinnel said. Investors who wait to buy in 2004 “will have missed it,” he said.

Among major growth-stock funds, Janus Fund lost 1.9% in the quarter, while value-stock giant Fidelity Equity Income slid 6.3%.

Some value funds were hurt as investors sold some popular value stocks in the quarter for company-specific reasons. Tobacco giant Altria Group was hurt by new concerns about health-liability costs. Mortgage lender Freddie Mac was hit by questions about its long-term financial picture.

Market pessimists, and some value proponents, say battered growth stocks are merely bouncing from deep losses since 2000, and that the rebound won’t be sustained. They still see value stocks as a safer play in a weak economy.

* The relatively strong performance of technology stocks was a big reason the growth sector held up as well as it did. The average technology stock fund was off 0.5%, after soaring 17.8% in the fourth quarter.

Whether the beaten-down tech sector finally is bottoming remains to be seen. Tech’s fans say the stocks are overly depressed; market bears say the shares still are too high-priced compared with the companies’ earnings potential.

Health care, another classic growth sector, also shined in the first quarter. The average health-care stock fund gained 1.1%, boosted by HMO stocks and biotech issues such as Amgen Inc.

* Despite growth stocks’ relative strength, a value-oriented sector -- real estate -- was the quarter’s best performer overall.

The average real estate fund was up 1.3% in the period. Though many of the real estate investment trust shares in the fund portfolios fell slightly in price, the stocks’ high dividend yields kept their total returns positive.

The question now for the real estate sector, analysts say, is whether the benefits of an economic pick-up -- if one occurs -- would offset the negative effect on real estate from the higher interest rates a rebound probably would bring.

* Precious metals funds were the quarter’s worst performers, falling 12% on average as gold’s price tumbled from the seven-year high of $379 an ounce reached in early February.

Gold was at $325.30 as of Friday. Its appeal as a haven has been dimmed as the war has gone better for the U.S. than some people expected, at least so far.

* Bigger stocks had an easier time than smaller stocks in the first quarter. The average large-cap growth fund’s 1.3% decline compared with a 4.1% drop in the average small-cap growth fund.

Smaller stocks held up far better than big-name stocks over the last three years, as the bear market raged. That reversed the trend of the late 1990s, when many brand-name bigger stocks trounced smaller shares.

Now, one factor in bigger stocks’ favor is the weaker dollar, said Sam Stovall, investment strategist at Standard & Poor’s in New York. A weaker buck helps multinational giants by automatically making their foreign earnings worth more when translated into dollars, he noted.

With the price declines of many blue-chip shares over the last three years, some investors also may feel more comfortable buying them now compared with smaller stocks that either have risen in price or haven’t declined as much, Stovall said.

* Most foreign stock funds fell much more than U.S. funds in the quarter, continuing the pattern of the last three years.

The average foreign fund lost 8% in the quarter. It would have been worse without the weak dollar, which cushioned U.S. investors’ losses.

Among regions, European funds slid 8.6% on average and Japanese funds were off 7.6%. The average diversified emerging-markets fund lost 6.2%, though losses in Latin American markets overall were muted.

Foreign markets’ woes reflected many overseas investors’ deeper concerns about the war and its effects, analysts say. In Asia, markets also have suffered in recent weeks from worries about the economic fallout from the pneumonia-like virus that has sickened thousands.

If the global economy strengthens, depressed foreign markets could see some of the largest bounces, at least in the short term, some analysts say.

Christopher Wolfe, equity strategist at J.P. Morgan Private Bank in New York, said that by some measures, European stocks are near their biggest bargain prices in 30 years. He also notes that, if the dollar has entered a long-term slide against other key currencies, that could be a help to U.S. investors in foreign shares over time.

Emerging markets such as those in Russia, China and Latin America intrigue some institutional investors who are looking for upside surprises in the next few years. Investors who have confidence in the long-term success of China’s booming economy should consider whether that’s an investment “story” to be buying now rather than later, Wolfe said.