Mutual funds show signs of ending slide
Mutual funds: the best and the worst (graphic)
By Amy Baldwin
Just a handful of categories suffered negative returns in the current quarter, according to preliminary data from Lipper Inc., a New York-based firm that tracks funds. That's a reverse from the third quarter, when nearly all the 41 equity fund categories that Lipper follows recorded losses.
But the stock market's slide over the past few weeks eroded the fourth-quarter gains and added to their declines for the year, and that's why market observers aren't rushing to say that funds have turned a corner.
"It's the biggest up move since the fourth quarter of last year. But some of these categories that have rebounded sharply are still sitting on steep losses for the year," said Scott Cooley, editor of fund tracker Morningstar's Mutual Funds newsletter.
Indeed, the fourth quarter's two biggest winners, telecommunications funds and technology funds, are also the year's biggest losers. For the quarter, telecom funds have a positive return of 27.1 percent, but for the year they are poised for a negative return of 40.4 percent. Tech funds enjoyed a quarterly return of 20.8 percent but are headed for a negative return of 41.6 percent for the year.
This pattern of a terrible year but good fourth quarter was also seen in diversified equity funds, which include companies of varying size as well as both the value and growth strategies. Small-capitalization growth funds had a positive return of 5.8 percent for the fourth quarter but a negative return of 28.9 percent for the year.
Just three categories tracked by Lipper saw negative returns in the fourth quarter and they are: Japanese funds with a negative return of 7.5 percent, Pacific region funds with a negative return of 1.3 percent, and specialty diversified equity funds, which employ practices that work well in bear markets, with a negative return of 4.6 percent.
But analysts are cautious about reading too much into the quarterly performance, saying it doesn't guarantee a robust year ahead. After all, funds enjoyed similarly strong performance this time last year but retreated when earnings and the economy continued to wobble.
"I'd feel a lot more optimistic if corporate profitability were improving at a faster rate," Cooley said.
Certain aspects of funds' recent performance also give investors reason to be careful. For example, only the most bear market friendly funds claimed positive returns for both 2002 and the fourth quarter. Gold funds have a quarterly return of 12.8 percent and a yearly return of a huge 62.2 percent.
And there are just two other types of funds that will end 2002 in positive territory specialty diversified funds, sometimes referred to as bear funds, with a return of 8.1 percent and real estate funds with 3.4 percent.
Only three of the 25 largest mutual funds are headed for yearly gains and all of them are bond funds or government back securities funds rather than stock funds. PIMCO Total Return has a yearly positive return of 9.8 percent, Vanguard GNMA has a positive return of 9.5 percent, and Vanguard Total Bond Market Index has a positive return of 7.8 percent.
Meanwhile individual stock funds have posted heavy losses during 2002. Of the 25 largest funds, the biggest loser is Fidelity Growth with a negative return of 31.9 percent and Janus Fund with a negative return of 26.7 percent.