- The Washington Times - Monday, January 1, 2007

NEW YORK (AP) — For mutual fund investors, 2006 was a year to sink cash into some of Wall Street’s lumbering giants and shy away from the kind of glitzy stocks that fueled the dot-com boom. That strategy paid off.

Investors fled to more stable investments, worried that the wind might get knocked out of the record stock market run. Looking to protect value, portfolio managers realized that they would find the greatest returns from funds that focus on blue chips and from funds filled with dividend-paying companies.

These investments are known for slow growth, but in 2006 they outpaced the Standard & Poor’s 500 Index. Funds that track high-growth industries such as technology languished.

“People were looking forward in case there’s a slowing economy or a slowing market,” said Jeff Tjornehoj, a senior research analyst with mutual funds watcher Lipper. “There’s a building consensus that large caps should take the leadership from small and mid caps sometime soon; a slower economy just bodes well for the group.”

As of Thursday, the 7,865 U.S. diversified equity funds — which have $3.74 trillion in assets — had an average return of 12.90 percent, according to Lipper. This was below the 14 percent increase in the S&P; 500 index for the same period.

It also was well below the 16.3 percent return in the S&P; 500 total return index, a benchmark used by the industry because it includes dividend appreciation. The Dow Jones Industrial Average, which tracks 30 of the nation’s biggest stocks, rose 16.29 percent for the year.

However, value funds made up of conservative, stable companies outperformed major indexes this year. For instance, large-cap value funds returned 18.55 percent during 2006, and multi-cap value funds returned 18.05 percent. Even large-cap core funds — a blend of mostly large caps and some companies deemed undervalued — returned 14.11 percent.

The biggest returns this year came from equity income funds, which comprise companies known for paying dividends. They returned 18.94 percent this year, according to Lipper.

This group traditionally is known for its ability to protect investors from volatility. The dividend acts as an anchor that makes sure the value gets neither too high nor too low.

But it’s little wonder dividend-paying companies fared so well last year. S&P; 500 companies had stockpiled more than $650 billion in cash going into 2006, thanks to record double-digit earnings during the past few years. Dividends rose about 12 percent for the 383 companies that pay them, according to S&P.;

“Investors turn to dividends for a more conservative approach, and that’s exactly what they were looking for [in 2006],” said S&P; senior index analyst Howard Silverblatt.

He said that if an investor were to put $10,000 in dividend-paying equities in 1979, there would be $439,566 in the portfolio today. If an investor bought only into companies that did not pay dividends, that amount would be $263,952.

Small- and mid-cap growth funds did not score double-digit gains during the year. But don’t count them out, Mr. Tjornehoj said. They had their best performance in the fourth quarter — with the small-cap growth funds’ 8.93 percent return besting the 6.84 percent for large-cap core funds.

But if you really wanted to make some serious money in 2006, your best bet was to look outside the United States to fetch some whopping returns.

Global stock markets far outpaced their American rivals, with record levels sweeping through Asia and even parts of Europe. The 2,283 world equity funds — with about $1.30 trillion in assets — saw 25.53 percent in returns during the year.

Emerging market funds had a 31.88 percent return, while Latin American funds jumped 43.73 percent. Asia-Pacific funds, excluding Japan, rose 29.61 percent.

The best place to sink your cash into was China. Funds that track the world’s fastest-growing economy returned a staggering 61.51 percent last year.

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