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INVESTING / QUARTERLY REVIEW & OUTLOOK

Hard to Find Winners in 2nd Quarter

The average domestic stock fund slumps 12.2% as investors flee the market. But there are a few bright spots.

July 08, 2002|JOSH FRIEDMAN | TIMES STAFF WRITER

The second quarter demonstrated again how much misery loves company on Wall Street.

For stock mutual funds, the quarter ended June 28 will be remembered as one of the worst ever, as investors fled the market amid worries over the economy, terrorism and corporate financial scandals.

Less than 7% of equity funds gained ground in the period, according to data from fund tracker Lipper Inc. The average domestic stock fund slumped 12.2%, according to Morningstar Inc., and 25 of 28 equity fund categories were in the red.

The average stock fund decline wasn't as large as the 17.6% loss in the third quarter of last year. But some of the most popular fund categories, already deep in the hole after two years of losses, dug deeper still.

The average large-capitalization growth stock fund, for example, lost 16.1% in the second quarter and 18.2% in the first half, Morningstar data show. That followed a 14.1% drop in 2000 and a 23.6% plunge in 2001.

Investors who figured the technology sector couldn't get much worse had a rude awakening: The average technology sector fund plummeted 28.6% in the quarter and 34% in the first half, after losing 38.3% in 2001.

There were some winners in the quarter. Precious metals funds (which usually own shares of gold mining companies), real estate funds and Japanese stock funds finished the period in the black. But few investors own those fund sectors. Combined, the categories hold less than 1% of all stock fund assets, according to Lipper.

Still, the declines in many fund categories were held to single digits in the quarter--a relative victory for the concept of portfolio diversification.

In general, funds focused on foreign stocks, "value" shares and smaller stocks recorded smaller losses than the average U.S. fund.

Relative Performance

Investors evaluating their individual funds should focus on relative performance rather than absolute performance, financial advisors say. Compare your fund to its category average, and look at the latest returns in the context of longer-term results.

For example, among large-cap growth funds, the Jensen Fund lost 12.4% in the second quarter and 9.5% in the first half, numbers that compare favorably with its category average. Over the last three years Jensen has gained an average of 5.2% annually, versus a 12.6% annualized loss for the category.

Janus Growth & Income lost 10.5% in the quarter, 10.7% in the half and 4.4% annualized over the last three years. But that fund, too, is holding up better than the average large-cap growth fund.

Conversely, the Franklin Gold & Precious Metals and Vanguard Precious Metals funds, both of which surged about 31% in the first half, look strong compared with the average stock fund. But they ranked near the bottom within their sizzling category: The average gold-oriented fund climbed 50.9% in the half.

Here's a look at some of the equity fund highlights in the second quarter and first half:

* Value-oriented funds outperformed growth funds in the quarter, as they have in seven of the last 10 quarters, Lipper said. In a dicey market, many investors continue to favor the lower price-to-earnings ratios and higher dividend yields that are the hallmarks of the value sector.

On average, value funds lost about half as much as their growth counterparts. The mid-cap value category slid 7.7%, for example, versus a decline of 14.2% for mid-cap growth.

Financial-services funds, a classic value sector, fell 4.5% in the quarter, on average, and were up 0.1% in the half.

* Small-cap stocks and stock funds held up better than their blue-chip counterparts, also continuing the trend of the last two years, as investors disappointed in blue chips search for new ideas.

The average small-cap blend fund (meaning a mix of small growth and small value stocks) lost 7% in the quarter, compared with a 12.5% drop for the average large-cap blend fund.

The average small-cap value fund eased 3.9% in the quarter but still was up 4.5% in the half.

* Precious metals funds rallied again, posting an 11.2% average gain in the quarter, the best of any stock fund category.

Rising gold prices continued to propel gold mining stocks. The precious metals fund category also finished 2001 and this year's first quarter as the top-performing equity fund category.

Although there has been no sign of higher inflation, which usually boosts gold prices, there has been no shortage of dour news to undermine investors' faith in stocks and the dollar and increase their desire for something tangible, said Morningstar analyst Christopher Davis.

Still, he cautioned that gold could lose its luster: "With no inflation and an economy on the mend, the long-term prospects of gold probably aren't that good," he said.

In fact, gold futures prices reached a peak of $327.80 an ounce on June 4, up from $279 at year-end, but have pulled back to $311 as of last week.

* Real estate sector funds continued riding the rally in real estate investment trusts, or REITs, which make up the bulk of the funds' holdings.

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