Mutual-fund analysts optimistic
By Josh Friedman
Los Angeles Times
War clouds are gathering. The economic outlook is murky. Oil prices are spiking. And stock mutual funds are coming off their third consecutive down year.
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 percent, the loss for the year still was 22.6 percent, 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 percent.
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 percent, and even small-cap value, a big winner in 2001, lost 10.3 percent.
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 percent on average, and real estate funds gained 4.1 percent, helped by the allure of "hard" assets and by the hefty dividend yields paid by real estate investment trust stocks.
On the other end, technology sector funds were the worst performers for a second straight year, plummeting 43.1 percent on average and bringing their three-year average annualized loss to 37.6 percent.
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 percent, and the flagship Janus Fund, a symbol of the 1990s' growth-stock market, dropped 27.6 percent. Both performed worse than the benchmark Standard & Poor's 500 index, which had a negative total return of 22.1 percent for the year.
Even most conservative "value"-style stock funds ended in the red. American Funds' Investment Company of America, for example, lost 11.9 percent; Vanguard Wellington fell 6.9 percent.
Among the few domestic funds gaining ground in 2002 were Yacktman Focused and Yacktman Fund, both managed by Donald Yacktman, which rose 15 percent and 11.4 percent, 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.
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 percent, and the Rydex funds that follow a bearish strategy.
