In July, It Was Safety First

As investors shunned risk, small-cap funds tumbled, tech took a dive, and bonds seemed like a good bet

By Amey Stone

As evidence started to mount in July that the economic recovery was cooling down, investors decided to take some risk off the table. For mutual-fund holders, that meant returns for the riskiest funds fell deeply into the red, while the safest funds managed to eke out some small gains.

The average diversified equity fund fell 4.8% in July. That was a far sight worse than the S&P 500 Index, which was down 3.3%, according to data from Standard & Poor's. The average bond fund climbed 0.9%, about on par with the 1% gain in the Lehman Bros. Aggregate Bond Index. (For complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)

TECH WRECK.

  The heightened aversion to risk meant that large-cap funds outperformed small-cap ones in July. It also meant funds that employ a value-oriented strategy, seeking out cheap stocks, did better than funds that search out earnings. Ironically, growth funds fell in July even as stellar second-quarter earnings were being reported. Stocks in the S&P 500 climbed a robust 25% in the second quarter over last year, according to data from earnings tracker Thomson First Call. Small-cap growth funds, for example, lost a punishing 8.5% on average in July. Large-cap value funds, however, fell just 2.6%.

Tech funds staggered in July as earnings for some companies in that sector disappointed. Software makers were particularly weak. Cautious comments from chief executives following strong results made investors worry that earnings growth was peaking. Tech, which was down 11.6%, was the worst-performing of all the sectors. The worst-performing stock fund in July was ProFunds Internet Ultrasector (INPIX ), which plummeted 23.2%. Reynolds (REYFX ), a large-cap fund packed with tech names, was the second-worst performer, down 21.8%. Royce Technology Value (RYTVX ) was the third-worst, down 20.6% as its value-orientation failed to shield it from losses in the sector.

HEDGING PAYS OFF.

  The normally defensive health sector fell a punishing 7.1% in July. Its downturn is likely due to investors' belief that the sector would be hurt if Democratic candidate John Kerry wins the Presidency. Scudder Global Biotechnology (DBBTX ), the worst performer among them, fell 13.6% in July.

The top-performing funds in July were those designed to make money when stocks go down. GE Contra, a fund that hedges using options and is meant to protect shareholders from broader losses when the stock market falls (and isn't open to the general public), gained a remarkable 21.4% to earn the top spot. Rydex Dynamic Venture 100 (RYVNX ) came in second, with a 16.2% gain, and ProFunds UltraShort OTC (USPIX ) came in third, with a 16.1% return.

Latin American funds, which have been star performers for the past 18 months, enjoyed the best returns of any sector, gaining 2.5% on average. The standout: iShares MSCI Brazil Index (EWZ ), which gained 7.5%. Natural resources, the second-best-performing sector, gained 2.1% on average, thanks to higher energy prices. ProFunds Energy Ultrasector (ENPIX ) and Fidelity Select Energy Service (FSESX ) were the best among them, up 4.8% and 3.8% respectively. Utilities and real-estate funds, the only other stock sectors in the black in July, eked out gains of 0.8% and 0.5% respectively.

WHITTLING BACK.

  On the fixed-income side, emerging-markets bond funds were the top gainers, with a 2.8% return, thanks again to the improving economies in Latin America. Otherwise, longer-term bond funds did better than their short-term brethren. General long-term bond funds gained 1.4%, while short-term bond funds gained 0.4%.

Of the bond-funds categories, only convertibles lost money, falling an average of 2.6%. Just as in the broader mutual-fund world, investors who fared best in July were those who whittled back on risk.

  The A-List Funds
Fund 5-Year Pretax Return
ABN AMRO Mid Cap N 13.4
ABN AMRO Real Estate N 14.7
AIM Real Estate A 17.5
AXP Precious Metals A 15.7
Aegis Value 17.2
Al Frank 18.5
AllianceBernstein Real Est Invstmnt Adv 14.9
AllianceBernstein Real Est Invstmnt Instl I 13.9
Alpine Realty Income & Growth Y 18.1
Alpine US Real Estate Equity Y 20.1
Amer AAdvantage Small Cap Value Instl 15.5
Amer Century Glbl Gold Inv 17.9
Amer Century Real Estate Inv 16.2
Amer Century Sm Cap Vl Inv 16.2
Amer Century Sm Company Inv 14.3
Armada Small Cap Value I 15.0
Artisan Small Cap Value 14.8
Berwyn 12.6
Bjurman Barry Micro Cap Growth 23.3
BlackRock International Opportunities Inv A 15.4
Boston Partners Small Cap Value II Invest 21.8
Brazos Real Estate Securities Y 14.1
Bridgeway Aggressive Investors 1 15.3
Bridgeway Micro Cap Limited 17.1
Bridgeway Ultra Small Company 29.5
Bridgeway Ultra Small Company Market 24.7
Bruce 27.6
Buffalo Small Cap 19.9
Burnham Financial Serv A 25.3
CGM Focus 27.6
CGM Realty 20.3
CRM Small Cap Value Instl 14.6
Calamos Growth A 16.7
Cohen & Steers Equity Income C 14.6
Cohen & Steers Realty Shares 15.5
Cohen & Steers Special Equity 18.4
Columbia Real Estate Equity Z 14.0
Columbia Small Cap Z 13.0
Constellation Clover Small Cap Value I 14.6
Davis Real Estate A 14.0
Delafield 15.1
Delaware RE Inv Tr A 15.1
Diamond Hill Bank & Financial A 15.6
Driehaus International Discovery 16.1
EII Realty Securities Instl 13.4
Eaton Vance Asian Small Companies A 17.0
Eaton Vance Wldwd Hlth Sciences A 14.5
Emerald Select Banking & Finance A 15.5
Evergreen Precious Metals A 23.9
Excelsior Real Estate 14.2
F Russell Real Estate Securities S 15.8
FBR Small Cap A 15.5
FBR Small Cap Financial A 20.3
FMC Strategic Value 14.4
FMI Sasco Contrarian Value 12.9
Fidelity Canada 14.4
Fidelity Low Priced Stock 15.3
Fidelity Real Estate Investment 16.1
Fidelity Select Gold 15.3
Fidelity Select Medical Delivery 12.7
Fidelity Select Medical Systems & Equipment 15.4
Fifth Third Micro Cap Value Instl 16.5
First American Real Estate Securities Y 16.3
First American Sm Cap Select Y 12.5
First American Small Cap Growth Opport Y 17.5
First Eagle Global A 14.7
First Eagle Gold A 25.4
First Eagle Overseas A 15.7
Forward Uniplan Real Estate Investment 13.7
Franklin Gold & Precious Metals A 15.3
Franklin Microcap Value 16.3
Franklin Real Estate Sec A 14.4
GMO REIT III 13.7
Gabelli Gold AAA 23.5
Gabelli Westwood Realty AAA 14.8
Goldman Sachs Real Estate Sec A 15.6
Goldman Sachs Small Cap Value A 14.1
Harris Insight Small Cap Value N 13.7
Heartland Value 16.2
Hennessy Cornerstone Growth 15.3
Hotchkis & Wiley Mid-Cap Value I 19.4
Hotchkis & Wiley Small Cap Value I 19.7
iShares MSCI Austria Index 14.7
ICON Energy 21.4
IMS Capital Value 12.7
ING Precious Metals 16.4
ING Russia A 33.4
INVESCO Energy Inv 13.6
INVESCO Gold & Precious Metals Inv 15.3
Ivy European Opportunities A 17.1
Ivy Global Natural Res A 16.7
Ivy Real Estate Securities A 15.3
JPMorgan Mid Cap Value I 15.5
Janus Mid Cap Value Inv 16.1
Janus Small Cap Value Inv 12.7
Jennison Health Sciences B 15.5
Jennison Natural Resources A 18.1
Lord Abbett Small Cap Value A 14.0
MFS International New Discovery A 14.1
Matthews Asian Growth & Income 16.0
Meridian Growth 13.9
Meridian Value 15.8
Merrill Lynch Global Small Cap C 13.2
Merrill Lynch Master Small Cap Value B 12.8
Morgan Stanley Instl US Real Estate A 14.7
Morgan Stanley Real Estate B 13.6
Munder Healthcare B 14.0
Munder Micro Cap Equity A 14.0
Munder Real Estate Eq Invmnt B 13.0
Munder Small Cap Value Y 14.8
Mutual European Z 12.5
NI Numeric Investors Small Cap Value 19.6
Neuberger Berman Genesis Inv 14.8
OCM Gold 20.3
Oberweis Micro Cap 14.6
One Group Small Cap Value I 14.5
Oppenheimer Developing Markets A 14.4
Oppenheimer Gold & Special Minerals A 16.0
Oppenheimer Real Asset A 16.8
PBHG REIT Advisor 14.6
PIMCO PEA Renaissance A 13.9
PIMCO RCM Biotechnology D 16.9
PIMCO RCM Global Healthcare D 13.8
Pacific Capital Small Cap Y 17.3
Perkins Discovery 16.4
Perritt Micro Cap Opportunities 19.4
Phoenix-Duff & Phelps Real Estate Sec A 18.2
Pioneer Real Estate Shares A 14.4
Principal Real Estate Securities A 16.1
RS Contrarian Value 13.3
RS Global Natural Resources 15.8
RS Partners 21.1
Royce Low Priced Stock 16.7
Royce Micro-Cap Inv 16.3
Royce Opportunity Inv 17.9
Royce Pennsylvania Mutual Inv 13.3
Royce Premier 13.2
Royce Select 15.2
Royce Special Equity 15.5
Royce TrustShares Inv 13.8
SAFECO Small Cap Value Inv 13.4
STI Classic Small Cap Value Equity L 12.7
Schroder Capital US Opportunities Inv 12.6
Scudder Gold & Precious Metals S 24.4
Security Capital US Real Estate 15.4
Security Mid Cap Value A 14.9
Sentinel Small Company A 13.9
Smith Barney Security & Growth A 12.7
Smith Barney Small Cap Value A 13.9
Spirit of America Real Estate A 14.3
State Street Research Aurora A 16.7
State Street Research Global Resources A 26.6
Strategic Partners Real Estate Securities B 15.8
Stratton Monthly Dividend REIT 14.6
Stratton Small Cap Value 12.7
Strong Advisor Small Cap Value Z 18.4
Strong Mid Cap Disciplined 14.7
T Rowe Price Mid-Cap Value 13.1
T Rowe Price Real Estate 16.2
T Rowe Price Small Cap Value 15.4
TAMARACK Enterprise S 13.9
TAMARACK Microcap Value S 13.3
TCW Galileo Opportunity N 13.4
TCW Galileo Value Opportunities I 15.6
Third Avenue Real Estate Value 18.1
Third Avenue Small Cap Value 13.8
Third Millennium Russia 25.3
Tocqueville Gold 24.0
Tocqueville Small Cap Value 13.8
Turner Micro Cap Growth 25.4
US Global Accolade Eastern European 19.8
US Global Inv Global Resources 16.8
US Global Inv Gold Shares 15.6
US Global Inv World Prec Minerals 15.4
USAA Precious Metals & Minerals 23.7
Undiscovered Managers Behavioral Vl Instl 14.5
Undiscovered Managers REIT Instl 17.0
Value Line Emerging Opportunities 12.6
Van Eck Intl Investors Gold A 15.1
Van Kampen Real Estate Securities A 13.6
Vanguard Energy 14.7
Vanguard Precious Metals 18.7
Vanguard REIT Index 14.7
Wasatch Core Growth 15.9
Wasatch Micro Cap 25.3
Wasatch Small Cap Growth 13.2
Wasatch Small Cap Value 19.7
Wells Fargo Small Cap Opportunities I 12.9
Wells S&P REIT Index A 14.0
 

Stone is a senior writer at BusinessWeek Online and covers the markets as a Street Wise columnist

Edited by Patricia O'Connell

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