Performance Eases the Sting of Scandal

Even as New York Attorney General Eliot Spitzer alleged abuses in the industy, funds were calming investor jitters with strong gains

By Amey Stone

The mutual-fund industry, embroiled in its first major scandal in a generation, has one major advantage as it battles to retain the shareholders' trust -- strong recent returns. (For full results of more than 9,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)

Heady recent gains for most stock funds will no doubt take some of the sting out of the already bruising rounds of allegations, admissions, and investigations kicked off on Sept. 3 by New York Attorney General Eliot Spitzer (see BW Online, 9/4/03, "Scandal Finds the Funds' Sly Secrets?"). In his bombshell of a complaint, Spitzer outlined "special trading opportunities" that one hedge fund was able to secure from four major fund families. He cites this as evidence of widespread abuse of investor trust in the mutual-fund industry.


  Since then, other securities regulators have promised to investigate the alleged trading abuses in the industry, and at least two firms mentioned, Janus (JNS ) and Bank of America, have promised to make restitution to any shareholders who lost money in the discretionary trading deals that Spitzer brought to light (see BW Online, 9/09/03, "Can Janus Save Face?").

Fund-industry trade group Investment Company Institute wrote to the Securities & Exchange Commission on Sept. 5, promising to cooperate with its investigation. "If true, the business practices alleged in the complaint grossly abused investor trust," ICI President Matthew Fink informed SEC Chairman William Donaldson. "We will do all that we can to make it clear that such behavior is intolerable and inexcusable."

Before the scandal broke, fund returns continued their ascent on the back of a charging bull market. In August, fund investors cheered at improving economic and corporate news, and they relaxed as interest rates, which surged in July, leveled off. U.S. diversified equity funds gained 3.2% on average in August, easily besting the 1.9% total return of the Standard & Poor's 500-stock index, according to data from Standard & Poor's. Year-to-date, diversified equity funds are up a stunning 20.6%, head and shoulders above the S&P 500's 15.9% runup.


  Bond funds, which stumbled badly in July, found their feet in August. The average bond fund gained 0.7% -- a welcome uptick after losing 2.8% the month before. Long-bond funds, which lost 6.5% in July, gained 1.6% in August. FBR Total Return Bond (RSGVX ) was the top-performing bond fund in August, with a 6.3% one-month gain.

Small-cap growth funds were the stars of the diversified equity-fund universe, up 5.3% on average in August -- and now, up 31.2% for the year. In contrast, large-cap value funds gained just 2% in August and are up 14.9% year-to-date.

Looking for an inflation hedge as the economic recovery gained speed, investors drove up the prices of precious-metals and natural-resources funds in August. Precious metals was the best-performing fund category, with a 13.8% gain. The leading fund in that category was Scudder Gold and Precious Metals (SCGDX ), which jumped 19.8% in August. Natural-resources funds rose 6.9%.


  Technology funds were up 7.6%, as new demand for semiconductors powered returns for the group. The top-performing fund for the month was ProFunds Semiconductor Ultrasector (SMPIX ), with a 23.6% one-month surge. Berkshire Focus (BFOCX ), which owns a lot of tech stocks, was also a top performer, gaining 14.8% in the month. Japan funds, too, scored heady gains, rising 10.2% in the month, benefiting from tech stock holdings. The Japan Fund (SJPNX ), for example, rose 15.1%.

The worst-performing funds in August were those that bet stocks would fall. ProFunds Ultrashort OTC (USPIX ) fell 10.1% in the month. Health-care funds also suffered, as big-name pharmaceutical companies saw steep profit-taking in August. The health-fund group fell 2% on average -- the worst-performing category in August and the only one in the red.

Such strong results give the newly battered mutual-fund industry plenty to boast of in the short term. That will help while Spitzer continues to shine a bright light on what may turn out to be the seamier side of the business.

August's A-rated Funds

1st Source Monogram Special Equity


ABN AMRO Veredus Aggressive Growth N

AIM Opportunities I A

AXP Precious Metals A

Aegis Value

Al Frank

Alliance Greater China 97 B

Amer Century Glbl Gold Inv

Amer Century Sm Cap Vl Inv

Armada Small Cap Value I

Artisan Mid Cap

BNY Hamilton Sm Cap Gr Inv.

Baron Growth

Baron Small Cap

Bjurman Barry Micro Cap Growth

BlackRock International Opportunities Inv. A

BlackRock US Opportunities Inv. B

Boston Partners Small Cap Value II Invest

Brazos Micro Cap Y

Bridgeway Aggressive Investors 1

Bridgeway Micro Cap Limited

Bridgeway Ultra Small Company

Bridgeway Ultra Small Company Market

Buffalo Small Cap

CGM Focus

CGM Realty

CRM Small Cap Value Instl

Calamos Growth A

Conseco Equity Y


Dreyfus Gr & Val Fds Midcap Value

Dreyfus Premier Emerging Markets A

Driehaus Asia Pacific Growth

Driehaus Emerging Markets Growth

Eaton Vance Wldwd Hlth Sciences A

Emerald Select Banking & Finance A

Evergreen Precious Metals Holdings A

Excelsior Mid Cap Value

FBR Small Cap Financial A

FBR Small Cap Value A

FMC Strategic Value

FMI Common Stock

FMI Focus

Fidelity Canada

Fidelity Japan Small Co.

Fidelity Low Priced Stock

Fidelity New Millennium

Fidelity Select Energy Service

Fidelity Select Gold

Fidelity Select Medical Systems & Equipment

Fidelity Small Cap Stock

Fidelity Southeast Asia

Fifth Third Micro Cap Value Instl.

First American Sm Cap Select Y

First American Small Cap Growth Opport Y

First Eagle Gold

Franklin Biotechnology Discovery A

Franklin Gold & Precious Metals A

Fremont US Micro Cap

Fremont US Micro Cap Instl.

GMO Emerging Countries III

Gabelli Gold

Hartford Mid Cap A

Heartland Value

Hennessy Cornerstone Growth

Heritage Mid Cap Stock A

Hotchkis & Wiley Mid-Cap Value I

Hotchkis & Wiley Small Cap Value I

ICM/Isabelle Small Cap Value Inv.

ICON Energy

ICON Information Technology

IMS Capital Value

ING Precious Metals

ING Russia A

INVESCO Energy Inv.

INVESCO Gold & Precious Metals Inv.

INVESCO Leisure Inv.

Ivy Global Natural Res A

JPMorgan Mid Cap Value I

Janus Mid Cap Value Inv.

Janus Small Cap Value Inv.

Jennison Natural Resources A

Kinetics Internet

Legg Mason Eq Tr Special Invmnt Prim

Legg Mason Glbl Tr Emerging Mkts Prim

Liberty Acorn Z

Liberty Newport Greater China A

Liberty Newport Tiger A

Lord Abbett Small Cap Value A

MTB Small Cap Growth A

Managers Emerging Mkts Eqty

Matthews Asian Growth & Income

Matthews China

Matthews Korea

Matthews Pacific Tiger

Meridian Growth

Meridian Value

Merrill Lynch Global Small Cap B

Merrill Lynch Master Small Cap Value B

Merrill Lynch Natural Resources A

Morgan Stanley Instl Small Cap Growth Inst.

Morgan Stanley Instl Small Company Gr B

Munder Healthcare B

Munder Micro Cap Equity A

NI Numeric Investors Emerging Growth

Navellier Perf Mid Cap Growth

Needham Growth

Neuberger Berman Genesis Inv.

North Track PSE Tech 100 Idx A

Nuveen NWQ Multi Cap Value R

OCM Gold

Oakmark International Small Cap I

Oakmark Select I

Oberweis Emerging Growth

Oberweis Micro Cap

Olstein Financial Alert C

Oppenheimer Developing Markets A

Oppenheimer Gold & Special Minerals A


PBHG Mid Cap

PIMCO PEA Renaissance A

PIMCO RCM Biotechnology D

PIMCO RCM Global Healthcare D


Perkins Discovery

Perritt Micro Cap Opportunities

Pioneer Small Cap Value A

Quaker Aggressive Growth A

RS Contrarian Value

RS Diversified Growth

RS Global Natural Resources

RS Partners

RS Smaller Co Growth

Reserve Private Eqty Small Cap Growth R

Rockland Small Cap Growth

Royce Low Priced Stock

Royce Micro-Cap Inv.

Royce Opportunity Inv.

Royce Trust & Giftshares Inv.

Rydex BioTechnology Inv.

Rydex Precious Metals

Salomon Brothers Small Cap Growth A

Santa Barbara Bender Growth Y

Saratoga Small Capitalization I

Scudder Gold & Precious Metals S

Scudder Micro Cap Invest

Security Mid Cap Growth A

Security Mid Cap Value A

Sentinel Small Company A

Smith Barney Aggressive Growth A

State Street Research Aurora A

State Street Research Global Resources A

Strong Advisor Small Cap Value Z

TCW Galileo Asia Pacific Equity I

TCW Galileo Opportunity N

TCW Galileo Value Opportunities I

Tocqueville Gold

Tocqueville Small Cap Value

Touchstone Emerging Growth A

Turner Micro Cap Growth

Turner Small Cap Value

UBS US Small Cap Growth Y

US Global Accolade Regent Eastern Euro

US Global Inv Gold Shares

USAA Precious Metals & Minerals

Value Line Emerging Opportunities

Van Eck Intl Investors Gold A

Vanguard Capital Opportunity

Vanguard Health Care

Vanguard Precious Metals

WM West Coast Equity A

Wasatch Core Growth

Wasatch Micro Cap

Wasatch Small Cap Growth

Wasatch Small Cap Value

Wasatch Ultra Growth

Westport Select Cap I

Stone is a senior writer at 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

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