Ending on a High Note
By James A. Anderson
Sometimes good -- or even fantastic -- short-term gains just can't compensate for long-term pain. Such was the case this past December -- and for the whole fourth quarter. Both periods gave stock-fund investors very positive results yet couldn't begin to make up for a rough rest of the year. The month gave bond-fund investors indications that the good times they've enjoyed for most of the year may well have come to an end. The proof: December saw the returns of many fixed-income portfolios drop, even after yet another Federal Reserve rate cut.
Almost every stock market index this past December showed gains. The Standard & Poor's 500 made a respectable advance of 0.9% to cap a 10.7% rally in the fourth quarter. Stock-fund managers did even better, earning their keep with an average 2.3% total return in December and a 13.7% advance in the quarter.
A solid month, however, couldn't wipe away the aftertaste of a rather sour 2001. The S&P 500 swallowed a 11.9% drop for the year. And by BusinessWeek calculations, equity funds did only marginally better, with a 11.2% decline.
SMALL IS BEAUTIFUL.
Domestic funds slightly outperformed overseas holdings last month. According to data compiled by BusinessWeek, funds investing exclusively in U.S. stocks finished with a 2.7% return for the month. Our international-fund category managed 2.2% over the same time.
Still, some overseas groups shined quite brightly. Latin America funds led all equity groups with a 10.4% total return in December, leaving the group down 4.1% for 2001. A 19.7% gain by the Mexican market helped nullify any aftershocks from Argentina's financial meltdown. Funds investing in emerging markets and those focused on the Pacifc/Asia region excluding Japan both ended the month with average gains of 6.1%.
In 2001, size -- or lack of it -- indeed mattered. Funds with shares of small and midsize companies, two relatively undervalued segments of the market, outperformed portfolios of pricier, better-known large-cap corporations. One group -- small-cap value funds -- managed not only a robust 6.1% average gain in December but finished the year with a 15.3% advance. Small-cap growth funds finished the month up 5.4% on average, while small-blend funds -- portfolios using both value and growth criteria to select stocks -- ended with a 5.6% average total return in December. Our mid-cap growth category recorded a 3.4% average gain, while mid-cap blend and mid-cap value funds logged 3.4% and 3.2% for the month, respectively.
Precious-metal funds led all BusinessWeek equity-fund categories for the year. An addled global economy and a world turned upside down by terrorism drove gold prices higher and helped the fund group log a 4.8% total return in December and a 19.9% climb in 2001.
Nevertheless, among the ranks of stock funds, a few trouble spots remain. For all the optimism that accompanied the advent of Japan's new Prime Minister, Junichiro Koizumi, in the spring, the nation's prolonged economic malaise still socked funds investing in the Nikkei. Our Japan fund category, which averaged a -5.7 total return for December, ended 2001 down 28.8%. And in search of greater growth in smaller, less pricey companies, investors steered away from blue-chip pharmaceuticals, leaving health funds off an average of 0.6% for the month. The group finished the year down 12.7%.
Rate slashing by the Federal Reserve did wonders for bond funds throughout 2001, but in December, after the central bank's 11th cut, there was a growing sense that Chairman Alan Greespan's ability to ease up on the money supply had come to an end. That, in turn, put a damper on fixed-income funds. Bond funds in BusinessWeek's database averaged a 0.7% slide in December, despite the fact that the group ended the year up 5% on average.
Emerging-market bond funds led our fixed-income lists with a 3% total return. In part, investors can thank Russia, where strong oil prices and a year of relative political calm helped paper issued by Moscow post gains strong enough to counter currency and economic problems in Argentina and Turkey. The emerging-market debt group closed the year with an 11% advance.
Second place among our fixed-income categories went to convertible funds, which hold bonds that can be exchanged for company stock. Closely following the upswing in equities, the group finished the month with a 1.1% climb. Still, the group found 2001 overall less than exciting, enduring an average 7% decrease for the year.
Frontier Equity (FEFPX ) finished atop our equity-fund lists with a 25.6% total return in December. A growth fund with a penchant for small tech and biotech names, Frontier is strapped with an outsized 15.6% expense ratio according to Morningstar. Its showing last month capped a fourth quarter in which the fund recorded a 24.2% total return, yet all the same, Frontier ended 2001 down 29.8%.
The top-performing fund from the BusinessWeek Equity A List was RS Diversified Growth A (RSDGX ). Its portfolio of small-cap growth shares propelled the fund to a 12.2% total return last month, in addition to a robust 36.7% over the last quarter. Because of a rocky start to 2001, however, RS Diversified Growth had little more than a 1.9% return to show for 2001.
Alliance Global Dollar Gov B (AGDBX ), an emerging-markets bond offering, led all fixed-income funds on our list with a 5.3% tally for December. A risky fund, Alliance Global Dollar's mix of bonds issued by such shaky places as Argentina, managed a decent 2001 with a 5.3% total return for the year.
First place for the month from our Fixed-Income A List belongs to Colorado BondShares (HICOX ), which notched a 0.4% return for December and finished the year up 7.2%.
December's stock market activity brought 13 new funds to our elite Equity A-List. The newcomers included a handful of upgraded small-cap funds. The 10 stock funds downgraded at the end of the month included large-cap portfolios bogged in a sector of the market that's out of favor. Five arrivals onto our Fixed Income A-list replaced six departures.
Equity A-List Upgrades
Brazos Small Cap Y
Credit Suisse Global Health Sciences Cmn
Dresdner RCM Global Health Care
Dreyfus Index Fds Midcap Index
FBR Small Cap Financial A
Fountainhead Special Value
Merrill Lynch Asset Bldr Mid Cap Value B
Munder Micro Cap Equity A
PBHG Large Cap Value
Rockland Small Cap Growth
US Global Leaders Growth
Equity A-List Upgrades
Longleaf Partners Small Cap
MS Hlth Sciences B
MS Special Value B
Matrix Advisors Value
Mutual Qualified Z
Mutual Shares Z
Tocqueville Small Cap Value
Vanguard LifeStrategy Income
Wachovia Special Values A
Fixed-Income A-List Upgrades
Evergreen Short Intm Muni A
Homestead Short Term Govt Sec
One Group Short Term Bond I
Strong Advisor Bond Instl
Vanguard Short Term Corp
Fixed Income A-List Downgrades
Amer Century Ltd-Tm Bd Inv
Dreyfus Inv Grd Bd Fds Interm-Term Inc
Dreyfus Inv Grd Bd Fds Short-Term Inc
Eaton Vance Prime Rate Reserves Mercury Short Term Investment I
Scudder High Yield Tax Free S
Anderson teaches journalism at the City University of New York. Follow his Mutual Fund Maven column, only on BusinessWeek Online
Edited by Patricia O'Connell
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