- The Washington Times - Wednesday, December 31, 2003

As the Dow Jones Industrial Average sailed back above 10,000 and the Nasdaq Composite Index made its own solid recovery this past year, mutual fund investors held on to a mix of caution and aggression that was the real foundation for Wall Street’s remarkable rebound.

They put their money not into hot stocks and funds, but into investments they believed would be reliable and consistent performers going forward. Fund performance figures issued by Lipper Inc. shortly before the year’s end showed investors were again drawn to the small-cap and midcap stock funds that were also some of better investments during the three-year bear market.

For example, small-cap value funds, which included smaller capitalization companies that the market believes to be underpriced, had a 41.51 percent for the year through Dec. 24 and a 14.66 percent return for the fourth quarter, according to Lipper. Those were among the best returns for diversified U.S. stock funds.

They were also drawn to the slightly more aggressive — but not too aggressive — small-cap growth funds. These funds returned 42.42 percent for the year and 11.05 percent for the quarter.

By contrast, the comeback in the high-tech sector showed signs of leveling off. Although Lipper’s science and technology fund category had a return of 52.98 percent return for the year through Dec. 24, one of the highest for any category, it returned a slower 10.89 percent from October through Dec. 24.

Andrew Clark, a senior research analyst with Lipper, said such results showed that investors, having learned a harsh lesson from the bubble in high-tech stocks in the late 1990s, weren’t plunging back into market segments that have proved to be risky.

“We’re seeing the [money] flows to safer vehicles,” he said. “We’ve not seen flows for the most part to science and technology.”

Mr. Clark said it was a little unusual to see such funds as small caps and midcaps flourishing in a bull market.

“I’m wondering if there’s a structural change inside the U.S. equity market,” he said.

For the year, almost all stock funds had double-digit returns in at least the 20 percent to 40 percent range.

The top-performing category was China region funds, with a 60.64 percent return for the year, and a 14.65 percent return for the final quarter.

International funds in general had a stellar year, although in the final quarter, Pacific region and Japanese funds turned in relatively disappointing single-digit returns. Gold funds, supported by a weak dollar, went against their usual trend of falling as stocks rise; for the year, gold funds returned 50.88 percent, with a solid 19.17 percent return in the final quarter.

Mr. Clark said international funds were doing well on expectations that economies in Europe and Asia will fully recover in 2004.

The only Lipper fund category to show a negative return was specialty diversified equity funds — no surprise, since those funds are designed to do well in market downturns.


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