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Yearly Review & Outlook

Quarter's Best, Worst in 'Growth' and 'Value'


The stock market often is a land of sharp reversals of fortune, but the difference between the third quarter and the fourth quarter of 2001 was one for the history books.

Many of the stock mutual funds that suffered the biggest losses in the third quarter became the hottest funds of the fourth quarter.

That was true in each of six major fund categories shown below: the large-stock, mid-size-stock and small-stock subsets of the growth-stock sector, and the same subsets of the value-stock sector. Shown are the quarter's 25 best-performing funds and 20 worst-performing funds in each subset.

The performance reversal raises a key question for the first quarter of this year and the year as a whole: Will the funds with the greatest fourth-quarter momentum continue to lead the pack, or could they burn out as quickly as they have flared?

Many or most of the fourth-quarter winners owed their gains to heavy investments in technology stocks--the same sector that had caused massive losses for fund managers and their investors in the first nine months of the year.

Among large-capitalization growth funds, for example, the Fidelity OTC fund sank 32% in the third quarter, weighed down by a 60% asset weighting in technology.

But that weighting then helped power the fund to a 29.9% gain in the fourth quarter.

Among mid-cap growth funds, the tech-dominated Van Wagoner funds in that category took top performance honors in the fourth quarter, after racking up some of the biggest losses of any equity funds in the third quarter.

Even with their fourth-quarter gains, many of the growth-stock funds that lead the charts on this page still ended the year deep in the red. Fidelity OTC fund, for example, lost 24.1% for the year.

Red ink for 2001 was less prevalent among small- and mid-cap value funds that led their respective categories in the fourth quarter. Many of them rose enough in the fourth quarter that they turned year-to-date declines as of Sept. 30 into net gains for the full year.

One example: The Dreyfus Small Company Value fund, the worst performer in that sector in the third quarter (with a decline of 31.1%), rocketed 41% in the fourth quarter and gained a net 28.6% for the year.

What that shows is that value-oriented funds aren't necessarily low-volatility funds, even though value investing often is associated with relative stability.

Even so, many value-oriented funds did appear to play it much safer with their clients' money overall last year. Some value funds that declined the least in the third quarter also posted smaller-than-average gains in the fourth quarter. For the year, however, many funds in this sector gained ground or lost less than the average fund.

The Oakmark Select fund in the mid-sized value category, for example, eased just 3.8% in the third quarter, when the blue-chip Standard & Poor's 500 index dived nearly 15%. In the fourth quarter, as the S&P jumped nearly 11%, Oakmark Select rose 8.3%. For the year it rose 26.1% while the S&P 500 fell about 12%.

If it's low volatility you seek in a fund, then, one place to shop would be among the worst-performers lists below, at least in the value category.

But also be sure to look at a fund's three-year average return and compare it with the category averages in the table on page U6. Some value funds have delivered low volatility in the last three years, but with minimal return.

Others, such as Oakmark Select, have handily beaten their category average for the three-year period.

Whether your focus is growth or value, if you want to bet that the stocks that powered Wall Street in the fourth quarter will continue to have the most momentum in 2002, the fourth-quarter fund leaders shown here may provide a good starting point for your shopping.

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