March's War Drums Rocked Funds

Uncertainty about Iraq -- and how it would play out -- put both equity and fixed-income funds on a roller-coaster ride

By Amey Stone

March was a volatile month for equity funds. The stock market fell in anticipation of the Iraq war, surged when fighting actually began, and then slipped again when it seemed the conflict could last longer and prove more difficult than first hoped. The average diversified equity fund ended the month up 0.9%, just a bit below the S&P 500-stock index' 1% gain (see BusinessWeek Online's Interactive Mutual Fund Scoreboard for complete results for more than 4,000 funds).

The entire first quarter was also rocky for funds because of investors' attitude toward the impending, and then actual, war. The average diversified stock fund fell 3.3% in the quarter, about the same as the S&P 500's 3.2% decline.

For the most part, the more conservative fund categories did the best in March. Health-care funds rose 3.9%, utilities 2.4%, and real estate 1.9%. The top-performing category in the month, however, was an exception to this general rule: Latin America funds turned in a top-notch 5.8% gain as Brazil's market recovered.

NET GAIN.

  The top-performing fund in March was Amerindo Technology (ATCHX ) -- a particularly risky bet. Packed with Internet names, it gained 14.6% in the month as Web plays surged on surprisingly strong financial results. Several biotechnology funds, like World Genomics Fund.com (GENEX ) and ProFunds Biotechnology Ultrasector (BIPIX ) were also among the top performers in March. They gained 8.7% and 7.4%, respectively.

The worst performers for the month and the quarter were precious-metals funds, which lost 6.9% in March and 11.4% for the quarter as investors traded out of what had been a haven for much of the prior year. Fidelity Select Gold (FSAGX ) lost 10% in the month.

With the exception of Latin America funds, most categories of foreign funds, including emerging-markets funds and Europe funds, lost money in March and for the quarter as geopolitical tensions and faltering economies led to plunging share prices. Funds in the international category fell 1.8% in March and 7% for the quarter. Funds that invest in Asia did particularly badly, losing about 4% in March and 7% for the quarter.

LONG-TERM REVERSAL.

  On the fixed-income side, the riskiest funds performed the best in March and the quarter as interest rates dipped. Largely on the backs of Latin America's gains, bond funds in the emerging-market category gained 2.3% in March and 7.9% in the quarter. The high-yield category gained 2.2% in March and 5.4% in the quarter. Convertible funds gained 0.8% in March and 1.5% in the quarter.

The worst-performing bond-fund category in March was long government, down 1.2%. That was a very different story from the past 12 months, when long-term Treasuries earned a stellar 16.6% return.

Overall in March and in the first quarter, unpredictable geopolitical events played a far stronger role in results than did portfolio manager skill. For fund investors, this volatile time period proves well why it's best to look at long-term performance, and not just short-term, when analyzing funds.

Equity Funds rated "A" in March:

ABN AMRO Real Estate N

AIM Global Health Care A

ARK Small Cap Equity A

Amer Century Equity Inc Inv

Amer Century Real Estate Inv

Ariel

Armada Small Cap Value I

Artisan Mid Cap

Artisan Small Cap Value

BNY Hamilton Sm Cap Gr Inv

Berger Small Cap Value Inv

Berwyn Income

Bjurman Barry Micro Cap Growth

BlackRock International Opportunities Inv A

Brazos Micro Cap Y

Bridgeway Aggressive Investors 1

Bridgeway Ultra Small Company

Bridgeway Ultra Small Company Tax Adv

Bruce

CGM Focus Calamos Growth A

Clipper

Cohen & Steers Equity Income C

Commonwealth New Zealand

Conseco Equity Y

Diversified Inv Short Hzn Stg Alloc

Dodge & Cox Balanced

Dodge & Cox Stock

Driehaus Asia Pacific Growth

Eaton Vance Wldwd Hlth Sciences A

Emerald Select Banking & Finance A

Evergreen Precious Metals Holdings A

Excelsior Real Estate

Exeter Pro Blend Conservative Term A

F Russell Real Estate Securities S

FBR Small Cap Financial A

FBR Small Cap Value A

FMC Select

FMI Focus

Federated Managed Income Instl

Fenimore Equity Income

Fidelity Advisor Mid Cap T

Fidelity Export & Multinational

Fidelity Japan Small Co

Fidelity Low Priced Stock

Fidelity New Millennium

Fidelity Real Estate Investment

Fidelity Select Biotechnology

Fidelity Select Gold

Fidelity Select Insurance

Fidelity Select Natural Gas

Fifth Third Micro Cap Value Instl

Fifth Third Strategic Income Instl

First American Real Estate Securities Y

First American Small Cap Growth Opport Y

First Eagle Global A

First Eagle Gold

First Eagle Overseas A

First Investors Multi-State Ins Tax Free NC A

Frank Russell LifePoints Conservative Stgy E

Franklin Biotechnology Discovery A

Fremont US Micro Cap

Fremont US Micro Cap Instl

Gabelli ABC

Gabelli Gold

Gabelli Westwood Realty AAA

Hartford Mid Cap A

Hennessy Cornerstone Growth

Heritage Mid Cap Stock A

Hotchkis & Wiley Mid-Cap Value I

ICON Energy

ICON Healthcare

ICON Information Technology

ICON Leisure and Consumer

IMS Capital Value

ING Index Plus Mid Cap A

ING Precious Metals

INVESCO Energy Inv

INVESCO Leisure Inv

JPMorgan Mid Cap Value I

Janus Adviser Balanced I

Janus Balanced

Jensen

Julius Baer International Equity A

Kinetics Internet

Leuthold Core Investment

Liberty Acorn Z

Longleaf Partners

Lord Abbett Mid Cap Value A

MFS International New Discovery A

MFS Strategic Value A

Mairs & Power Growth

Marshall Mid Cap Value Inv

Matthews Asian Growth & Income

Matthews Korea

Merger

Meridian Growth

Meridian Value

Merrill Lynch Global Small Cap B

Merrill Lynch Healthcare B

Monterey OCM Gold

Montgomery Partners Long Short Eqty Plus R

Morgan Stanley Health Sciences Trust B

Morgan Stanley Instl Small Company Gr B

Morgan Stanley Instl US Real Estate A

Mosaic Equity Tr Mid Cap

Mutual European Z

Mutual Financial Services A

Navellier Perf Mid Cap Growth

Needham Growth

Neuberger Berman Genesis Inv

Oakmark Equity & Income I

Olstein Financial Alert C

Osterweis

PBHG Mid Cap Value

PIMCO RCM Biotechnology D

PIMCO RCM Global Healthcare D

Parnassus Income Equity Income

Permanent

Phoenix-Duff & Phelps Real Estate Sec A

ProFunds Bear ProFund Inv

Prudent Bear

Prudential Natural Resources A

Quaker Aggressive Growth A

Reserve Private Eqty Small Cap Growth R

Rockland Small Cap Growth

Royce Low Priced Stock

Royce Opportunity Inv

Royce Premier

Royce Total Return

Royce Trust & Giftshares Inv

Rydex URSA

Schroder Capital Ultra Inv

Scudder Gold & Precious Metals S

Scudder Health Care S

Scudder Lifecycle Short Range Invest

Scudder Micro Cap Invest

Scudder Target 2010

Security Capital US Real Estate

Security Mid Cap Value A

Sentinel Small Company A

Smith Barney Aggressive Growth A

Spirit of America Real Estate A

Stratton Monthly Dividend REIT

Strong Advisor Small Cap Value Z

T Rowe Price Capital Appreciation

T Rowe Price Health Sciences

T Rowe Price Real Estate

TCW Galileo Value Opportunities I

Thompson Plumb Balanced

Thompson Plumb Growth

Touchstone Emerging Growth A

Transamerica Premier Growth Oppt Inv

Turner Micro Cap Growth

USAA Precious Metals & Minerals

Undiscovered Managers REIT Instl

Value Line Emerging Opportunities

Vanguard Capital Opportunity

Vanguard Health Care

Vanguard LifeStrategy Income

Vanguard Precious Metals

Vanguard Wellesley Income Inv

WM Flexible Income B

WM West Coast Equity A

Waddell & Reed Adv Asset Strategy A

Waddell & Reed Adv Science & Technology A

Wasatch Core Growth

Wasatch Micro Cap

Wasatch Small Cap Growth

Wasatch Small Cap Value

Wasatch Ultra Growth

Weitz Partners Value

Weitz Value

Wells Fargo Strategic Income I

Westport R

Westport Select Cap R

Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column

Edited by Patricia O'Connell