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INVESTING: Quarterly Review & Outlook

Most Domestic Fund Sectors Rise in Second Quarter

July 05, 2001|JOSH FRIEDMAN | TIMES STAFF WRITER

After a dismal first quarter in which nearly every stock mutual fund category lost ground, the second quarter brought investors widespread relief: A strong market rally lifted fund categories almost across the board.

At the top of the list among diversified funds were those that focus on smaller stocks, continuing a trend that began in mid-2000.

Small-cap growth stock funds surged 17%, on average, in the second quarter, according to fund-tracker Morningstar Inc. Small-cap value stock funds gained 13.1%, on average, and small-cap blend funds--which hold a mix of growth and value issues--rose 14.4%.

For the first half, small-cap value funds led Morningstar's tally of 28 major stock fund sectors, with a 13.4% average gain (tied with gold funds).

Funds that focus on shares of mid-size companies also were strong in the quarter. And the small-cap and mid-cap categories all outpaced large-cap fund categories--again.

The now year-old shift in market leadership from big stocks to small and mid-size issues is payback, of sorts: Large-cap stocks dominated during the bull run of the mid- to late 1990s, but now the pendulum has swung away from those shares to less-familiar names.

Meanwhile, for investors in battered technology funds, there were signs in the second quarter that momentum may have begun to swing back in their favor. But that pendulum has a long way to go.

Tech-focused funds gained an average of 13.2% in the second quarter, while telecom-focused funds rose 5.3%, Morningstar said.

But when any market sector falls as far as tech and telecom have from their peaks in early 2000, the math of recovery can be daunting. Despite their second-quarter rallies, the tech and telecom fund categories were down 26.3% and 21.5%, respectively, in the first half.

Tech funds that rebounded sharply in the quarter included Fidelity Select Software & Computer Services, which jumped 40.6%, the best gain of any stock fund; Amerindo Technology, an Internet-heavy fund that rocketed 36.5%; and T. Rowe Price Developing Technology, which rose 31.2%.

Some of the quarter's other big winners included aggressive funds that aren't officially tech funds but are known for holding sizable tech stakes. They included Roulston Emerging Growth, up 39.1%, and Atlas Emerging Growth, up 38.4%.

The tech sector's bounce--tied in part to hopes for a turnaround in the sagging economy--helps explain why growth funds fared moderately better than value funds in the second quarter, as many tech stocks still sell for high valuations relative to earnings.

Even so, value-oriented funds held up much better than growth funds in the first six months overall, thanks to many investors' renewed appreciation of classic value-stock traits--such as relatively low price-to-earnings ratios and above-average dividend yields.

Among other fund sector highlights of the second quarter and first half:

* Shining brightest of all in the quarter were precious metals funds, which typically own gold-mining shares. The sector notched the best gain of any category in the quarter, rising 19.3%, on average.

But that may not change most investors' dim view of gold itself, which has been in a slump for years. Mining stocks got a lift in part from expectations of further consolidation in the industry.

Precious metals funds still have the worst five-year return of any Morningstar category: an average annualized loss of 14.4%.

"You can get clipped very quickly if you chase one of gold's hot episodes," said Don Cassidy, senior research analyst at fund researcher Lipper Inc. in Denver.

Most investors may not have even noticed gold's second-quarter run. Of the fund industry's roughly $7 trillion in assets, only about $2 billion is in precious metals funds.

* Health-care funds jumped 14.9% in the quarter, on average, getting a boost as biotechnology stocks resurged.

The Amex biotech stock index climbed 30.1% in the quarter. That offset a modest slide in major drug and HMO stocks in the period.

Health-care funds boast the best return of any Morningstar category over the last three years, with an average annualized gain of 19.1%.

* Financial services funds rose an average of 8.4% in the quarter, pulling into the black year to date. Powered by strong returns in the last year as interest rates have tumbled, the sector has the best five-year performance of any Morningstar category: an average annualized gain of 17.8%.

* Value-hunting investors helped push real-estate-focused funds up 10% in the quarter and 8.2% in the half. These funds own real estate investment trust shares, which in turn own commercial, industrial and residential buildings nationwide.

"They feel like a safe harbor in this market," Cassidy said. "The funds add diversification, and that dividend yield feels comfy."

* Although most domestic fund categories gained ground, most foreign stock funds struggled in the quarter. The average foreign fund inched 0.2% higher. World funds, which invest in U.S. companies as well as abroad, gained 3.5%.

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