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REVIEW & OUTLOOK: MUTUAL FUNDS

After 3 Years of Losses, Stock Funds' Biggest Challenge May Lie Ahead

Managers See Cause for Optimism in Year-End Stock Market Rally

January 06, 2003|Josh Friedman | Times Staff Writer

War clouds are gathering. The economic outlook is murky. Oil prices are spiking. And stock mutual funds are coming off their third down year in a row.

In other words, fund managers say, it's time for optimism.

"To predict a fourth losing year would be crazy," said Douglas Foreman, who manages the TCW Galileo Aggressive Growth Equity and TCW Small Cap Growth funds in Los Angeles. "I don't know what else can go wrong."

Any turnaround, of course, would be warmly welcomed.

Despite a fourth-quarter stock market rally that lifted the average U.S. equity fund 5.9%, the loss for the year still was 22.6%, according to fund tracker Morningstar Inc. That was the worst performance since 1974 and about twice as bad as 2001, when the average fund slid 10.9%.

The last time stock funds endured three consecutive losing years was 1939-41.

"The third time was not charming," said Don Cassidy, senior research analyst at Lipper Inc. in Denver.

There was almost nowhere for fund investors to hide in 2002, with each of the nine major Morningstar stock fund categories ending in the red. Large-cap growth, for instance, tumbled 27.7%, and even small-cap value, a big winner in 2001, lost 10.3%.

For The Record
Los Angeles Times Wednesday January 08, 2003 Home Edition Main News Part A Page 2 ..CF: Y 11 inches; 420 words Type of Material: Correction
Mutual fund returns -- Articles on mutual funds in Monday's Business section contained some erroneous fund returns provided by Morningstar Inc. An article on bond funds said the 2002 return for the Excelsior California Tax Exempt Income Fund was 4.7%. Its return last year was 6.5%. An article on stock mutual funds said 2002 returns for the Evergreen Precious Metals Fund and the Prudent Bear Fund were 38.4% and 50.6%, respectively. The returns for those funds were 72.4% and 62.9%, respectively. Corrected tables showing all fund returns appear on C12-15.

The market's decline was so broad that among 27 stock fund sector categories, only two finished in the black: Precious metals funds -- traditionally seen as a haven during tough times -- soared 63% on average, and real estate funds gained 4.1%, helped by the allure of "hard" assets and by the hefty dividend yields paid by real estate investment trust stocks.

Among precious metals funds, which added to 2001's 20.2% gain, leaders included American Century Global Gold and Evergreen Precious Metals, which soared 73% and 38.4%, respectively.

In the real estate sector, AIM Real Estate gained 8% and Cohen & Steers Special Equity returned 7.7%.

On the other end, technology sector funds were the worst performers for a second straight year, plummeting 43.1% on average and bringing their three-year average annualized loss to 37.6%.

Many of the most popular stock funds recorded double-digit losses in 2002. The $61-billion Fidelity Magellan fund, a common choice in 401(k) retirement plans, sank 23.7%, and the flagship Janus Fund, a symbol of the 1990s' growth-stock market, dropped 27.6%. Both performed worse than the benchmark Standard & Poor's 500 index, which had a negative total return of 22.1% for the year.

Even most conservative "value"-style stock funds ended in the red. American Funds' Investment Company of America, for example, lost 14.5%; Vanguard Wellington fell 6.9%.

Among the few domestic funds gaining ground in 2002 were Yacktman Focused and Yacktman Fund, both managed by Donald Yacktman, which rose 15% and 11.4%, respectively. Yacktman, who tends to follow a "deep-value" approach, by the end of the third quarter had loaded up on such out-of-favor names as AOL Time Warner and Electronic Data Systems.

Winners among small-cap funds included Royce Special Equity, managed by Charlie Dreifus, which gained 15% for the year, helped by rallies in shares of companies such as athletic shoe maker K-Swiss and tire maker Bandag.

Not surprisingly, funds that actively bet against stocks, such as through "short" sales, again were big winners. Leaders included Prudent Bear, managed by David Tice, which surged 50.6%, and the Rydex funds that follow a bearish strategy.

Meanwhile, the average foreign stock fund lost 13.8% for the year. Foreign losses were cushioned by the weak dollar.

First Eagle SoGen Overseas, managed by the valuation-conscious team of Jean-Marie Eveillard and Charles de Vaulx, climbed 12.5%, topping the foreign fund list.

Emerging-markets funds weathered the downturn even better, losing 5.9% on average, as rising economies in countries such as Russia, South Africa and Thailand defied the losing trend in most of the world.

The dreary year contained a kernel of hope for investors -- a fourth-quarter rally that helped many funds post big gains in the waning months. Battered tech funds led the way with a 17.8% jump.

Jacob Internet fund rocketed 60% in the quarter, slashing its loss in 2002 to 13%. Other hot tech funds included Fidelity Select Software & Computer Services, up 31.6%, and RS Information Age, up 35.1%.

Skeptics noted, however, that 2001 also ended on a high note -- which quickly turned sour as 2002 got underway.

In other trends last year:

* For a third year, funds that focus on so-called value stocks -- typically, shares selling for below-average price-to-earnings ratios -- performed better than growth funds, which generally target higher-growth, higher-P/E shares. But value funds' losses still were so large their "victory" over growth may seem hollow.

The average large-cap value fund's loss was 18.9% for the year, compared with a 27.7% loss for the average large-cap growth.

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