One wild week for mutual funds down. Fifty-one more to go.
The stock market finished the week on a strong note, but along the way it reminded fund investors why volatility isn't always their friend.
"It was a welcome wake-up call for a lot of investors in high-risk, high-return categories" such as technology, said Ed Rosenbaum, director of research for New York-based fund tracker Lipper Inc. "Welcome," he said, "because the impact on people's net assets has been, on average, noticeable but not devastating."
After Friday's rally, the average domestic stock fund ended the week down only about 2%. But before the rally, it was down more than 5%--slightly more than the 4.5% loss in the benchmark Standard & Poor's 500 index of blue-chip stocks in the first four days of the week.
Among the trends that emerged:
* The losers. They were last year's big winners, as profit-takers swarmed.
Japan, telecommunications and technology sector funds--many of which doubled investors' money last year--stumbled out of the gates this week, falling 10.7%, 5.9% and 5.6%, respectively.
Tech and telecom funds were down considerably more during the week, but benefited from Friday's 155-point surge in the Nasdaq composite index.
Among the big tech losers: ProFunds UltraOTC, which lost more than 23% of its value from Tuesday through Thursday before ending the week down more than 10%; Nicholas-Applegate Global Technology, last year's top gainer with a 494% rise, which fell 8.5% this week; and PBHG Growth, down 6.9%.
For the average Japan fund, more than a third of the net loss was due to the yen's weakening against the dollar. The rest was the stocks' decline.
Despite all of this, many fund companies report investors were net buyers of Japan, telecom and tech funds this week, most likely based on last year's hot numbers. If new money continues to flow in next week, it could mean these sectors will revive quickly.
* The winners. Building on a fourth-quarter recovery last year, health-care sector funds gained nearly 6% on average this week. Much of that came on Friday as drug stocks rocketed.
Only two other categories of funds ended the week higher than they started it: real estate funds and natural resources funds, both classic value plays.
* Momentum interrupted. Last year, momentum-minded small-growth stock fund managers were among the most successful active fund managers around.
This week, many of the best-known small-growth managers faltered as tech fell and some traditional value sectors took off. Among them: Jim Callinan of RS Emerging Growth. His fund fell 6% this week versus the 4.6% drop in the average small-growth fund. Earlier this week, Callinan was named Morningstar Inc.'s domestic stock fund manager of the year.
* Sector rotation. Tech and telecom were out. Paper, pulp and chemicals were in, as investors looked for other potential beneficiaries of a strong economy.
Two of last year's biggest fund gainers, Fidelity Select Technology and Fidelity Select Telecommunications, got hammered, falling 6.7% and 6%, respectively, this week. Meanwhile, overlooked funds such as Fidelity Select Paper & Forest Products and Fidelity Select Chemicals soared. They were up 5.3% and 4.5%, respectively.
* Value revisited. Despite major moves in traditional value stocks, the average small-cap, mid-cap and large-cap value funds still ended the week slightly lower than they started.
That's the glass-half-empty view. The glass-half-full spin is this: A major argument for investing in value funds--which invest in beaten-down or overlooked stocks trading at bargain prices--has always been that these funds invest in securities that are already depressed. So when the markets fall, they have less room to fall.
In recent years, value hasn't worked so well in practice. This week, though, the average value fund fell significantly less than the average growth fund.
Do you have ideas for mutual fund and 401(k) topics? Times staff writer Paul J. Lim can be reached at email@example.com.
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Fast and Slow Starts in 2000
The best- and worst-performing equity mutual fund groups so far this year:
Gains or small losses
% change 3-year Category for week return* Health +5.9% +19.1% Real estate +1.8 +0.0 Natural resources +1.2 --0.3 Large value --0.6 +14.3 Mid-cap value --0.9 +10.5 Emerging markets --0.9 +4.5 Domestic stock avg --2.2 +18.7
% change 3-year Category for week return* Japan --10.7% +19.6% Pacific/Asia --9.2 +7.3 Communications --5.9 +45.4 Technology --5.6 +51.7 Foreign --5.0 +17.1 Small growth --4.6 +22.9 Intl. stock avg --4.3 +12.7
Sources: Morningstar, Bloomberg News