| | Mutual Funds
Fourth-quarter rally helps, but doesn't heal
Two risky sectors led the way, raising questions about the broader rally's sustainability. Also, why at least one insider says you'll be rewarded for taking risks in 2003.
By Timothy Middleton
Thanks to a market rally, mutual funds came to life in the fourth quarter, with the two riskiest elements, technology and emerging markets, leading the way. But will it last?
The recent performance was much better than the shrinking double-dip crowd had expected, says Steve Leuthold, manager of Leuthold Core Investment Fund (LCORX). I expect economic leadership to be rotational, with capital expenditures (including tech) picking up in 2003," he wrote in a research report. "GDP growth may be a modest 3% to 4% next year, with the economy not hitting on all cylinders, but then it rarely does.
The Nasdaq Composite ($COMPX) shot up about 15% in the quarter. That was nearly twice the roughly 8% advance of the S&P 500 Index ($INX).
Funds investing in Treasury bonds actually declined 0.6% in the quarter, as the flight to quality that had characterized the prior 10 quarters was reversed. Below-investment-grade bond funds were the fixed-income leaders, climbing an average of 5.9%, according to Lipper.
Staying in the red
Despite the quarters rally, equities remain deeply in the red, with the Nasdaq down about 30% for the year and tech funds off roughly 40%. But the rally appears to have at least put the bear market on hold. Another of Leutholds funds, Grizzly Short (GRZZX), was among the fourth quarters biggest losers, with a decline of about 11%.
The fourth-quarter rally was broad and deep, lifting every form of equity except real estate investment trusts, which have fixed-income attributes. Technology funds spurted about 17% in the period, followed by emerging markets portfolios, which gained 11%.
Curiously, gold funds continued to advance in the period, bringing their total gains for the year to 56%. Good news for stocks is often bad for gold, but precious metals are getting support as a haven from international issues such as the prospect of war in Iraq, as well as from bullish hedge-fund managers and squeezed short sellers.
| Fourth-quarter results | | Market index or sector | Q4 perf. (%) | Year-to-date perf. (%) | | Nasdaq composite | 15.5 | - 30.6 | | Dow Jones Industrial Average | 10.2 | - 16.5 | | S&P 500 | 8.5 | - 23.0 | | | | | Technology | 17.4 | - 40.7 | | Emerging markets | 11.3 | - 2.7 | | Large value | 8.8 | - 19.6 | | Gold | 8.5 | 56.1 | | Midcap value | 6.3 | - 14.9 | | Large growth | 5.2 | - 27.5 | | Small value | 5.1 | - 11.6 | | International | 5.0 | - 15.2 | | Midcap growth | 4.8 | - 28.4 | | Small growth | 4.7 | - 28.2 | | Financial services | 4.7 | - 11.8 | | Health care | 1.5 | - 26.1 | | Real estate | - 1.2 | 1.8 | | | | | High-yield bonds | 5.9 | - 2.6 | | GNMAs | 1.1 | 8.3 | | A-rated corporates | 0.8 | 7.9 | | Treasurys | - 0.6 | 11.3 |
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Notes: Data through 12/19/02. Indexes returns don't reflect dividends.
Source: Lipper
The individual funds that were the quarters biggest winners and losers reflect these market tides.
| The quarters big winners | | Fund | Q4 perf. (%) | | Jacob Internet (JAMFX) | 54% | | Smith Barney Telecom Income (ATINX) | 40.1 | | Nevis Fund (NEVIX) | 37.1 | | Amerindo Technology (ATAHX) | 31.7 | | Firsthand e-Commerce (TEFQX) | 31.2 |
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Jacob Internet (JAMFX) and Amerindo Technology (ATAHX) went from goats to rams once more as their high-tech portfolios prospered. But Nevis Fund (NEVIX) is a money pit. A highly concentrated portfolio that tripled in 1999, it was flooded with assets and then lost nearly everything. It tumbled 24.9% in 2000, 44.4% in 2001 and some 46% this year, even after its big bounce in the quarter.
| The quarters big losers | | Fund | Q4 perf. (%) | | Fidelity Select Medical Delivery (FSHCX) | - 19.8 | | DFA Japanese Small Company (DFJSX) | - 14.8 | | Navellier Top 20 A (NTGRX) | - 11.7 | | Phoenix Market Neutral A (EMNAX) | - 11.1 | | Grizzly Short (GRZZX) | - 11.1 |
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The quarters biggest loser is a fund almost nobody should own, Fidelity Select Medical Delivery (FSHCX). It invests in the most volatile corner of the health sector, hospitals and service providers. One of its largest positions, with more than 12% of assets, has been Tenet Healthcare (THC, news, msgs), which shed two-thirds of its value in the quarter after concerns arose about its Medicare billing practices.
Navellier Top 20 (NTGRX) is another money pit, with its $16.4 million of assets (down from $28.6 million a year ago) concentrated in a handful of names in health care, consumer goods and financial services.
Phoenix-Capital West Market Neutral (EMNAX) is highly volatile, due to its strategy of balancing long positions with shorts, and was ahead 6.8% for the full year as of Dec. 19.
Large funds finished Q4 ahead
All of the nations largest mutual funds finished the fourth quarter ahead, although Fidelity Contrafund (FCNTX) barely squeaked by, with a gain of 0.4%.
| How the largest funds fared | | Fund | Q4 perf. (%) | YTD perf. (%) | | Fidelity Magellan (FMAGX) | 8.3% | - 23.1% | | Vanguard 500 (VFINX) | 8.9 | - 21.8 | | American Funds Invest Co of America (AIVSX) | 7.7 | - 14.6 | | American Funds Washington Mutual (AWSHX) | 7.5 | - 15.3 | | Pimco Total Return (PTTAX) | 1.9 | 9.6 | | American Funds Growth Fund of America (AGTHX) | 7.6 | - 21.6 | | Fidelity Contrafund (FCNTX) | 0.4 | - 10.3 | | Fidelity Growth & Income (FGRIX) | 5.9 | - 17.8 | | American Funds EuroPacific (AEPGX) | 7.2 | - 14.1 | | American Funds New Perspective (ANWPX) | 9.9 | - 16.4 |
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Note: Data as of 12/19.
Source: Lipper
Many market strategists expect the quarters gains to presage a healthy market in 2003.
We don't think the economy will fall into a double-dip recession, and we don't think you'll see deflation, disinflation or inflation, said Don Ross, chief investment officer of National City Investment Management, which runs the $16 billion Armada family of funds.
We believe both the quantity and quality of earnings will return, and small-cap stocks will lead the equity horse race, he said. He also recommends growth over value stocks, and corporate over Treasury bonds. "We believe you will be paid for taking credit risk, for the first time in several years.
At the time of publication, Timothy Middleton owned none of the securities mentioned in this article.
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