- The Washington Times - Thursday, July 6, 2000

NEW YORK The second quarter was rough on most mutual fund investors as last year's darlings the science/technology and telecommunications sectors have turned into this year's busts.

Most categories of funds either lost ground or saw modest gains in the April-to-June period.

For nearly two years, science/ technology and telecommunications funds were at the forefront of what may well be remembered as the golden era of mutual funds. All of that changed this past spring, however, when investors suddenly soured on technology stocks, especially shares of upstart Internet companies.

For the quarter, telecommunications funds slid 14.6 percent, more than any other category, while science/technology funds fell 11.9 percent, according to Lipper Inc., a New York company that tracks mutual fund performance.

The losses represented a complete reversal of fortune for the two sectors from their performances in 1999, when telecommunications funds rose an average of 71.7 percent and science/technology funds rose an astounding 132.3 percent.

Investors' sudden change of heart over technology helped drag down the entire fund industry. But things could have been worse.

"Most funds appear to have received only flesh wounds. They've been hurt, but they haven't been killed outright," said Ed Rosenbaum, director of research at Lipper.

A handful of sector-specific funds eked out gains for the quarter, including health/biotechnology funds, which rose 21.3 percent, real estate funds, up 13.5 percent, natural resources funds, up 5.9 percent, and financial services funds, up 2.3 percent.

Analysts said the health/ biotechnology sector prospered primarily because investors were looking to invest in a growth sector other than anything connected to the Internet.

Real estate and natural resources funds benefited from cyclical events common to the U.S. stock markets.

Real estate stocks were pummeled last year and many investors believe they are now undervalued and can be bought at bargain prices, according to market observers. Natural resources stocks have risen as oil prices have soared in recent months, putting renewed emphasis on alternative energy sources.

Finally, financial services stocks surged late in the quarter when it became apparent that the Federal Reserve might be finished raising interest rates for the time being. That could help free up investment dollars and make it easier for people to borrow money.

Investor dismay with technology stocks may be signaling the beginning of the end of a decade-long infatuation with "growth funds" and the start of a shift to value funds.

Growth funds, many of which include stocks from untested technology companies with great potential, felt the brunt of investors' wrath last quarter.

For example, funds that focus on a wide array of growth companies of all sizes fell 5.4 percent in the second quarter, more than any other category of funds that invest in diverse categories, according to Lipper.

Meanwhile, value funds, or funds that focus on companies whose stocks are believed to be selling at a discount to similar companies, appear to be gaining momentum. Indeed, the only categories of diverse stock funds that gained ground in the second quarter were ones that focus on small and midsize value companies.

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