July 6, 2004

Domestic Equity Funds -- Mid-Year 2004 Review

Amid Uncertainty, Investors Seek Bargains

July 1, 2004 -- So far this year, value funds have been in the winner's circle, as negative headlines apparently are driving investors to attractively priced, high-quality stocks.

"Investors don't like uncertainty," said Sam Stovall, chief investment strategist of Standard & Poor's, adding that there has been a rotation toward value investments because of higher interest rates and questions about the strength of the U.S. economic recovery. These uncertainties are fueling gains for value stocks, which generally pay higher dividends, Stovall noted. So far this year, domestic equity fund returns mirror this trend, with value funds leading in each category.

Value funds may be holding up better amid the year's difficulties, but U.S. stock fund returns suggest investor concerns are having an impact. So far this year, the average domestic equity fund is up 3.99% and the S&P 500-stock index is up 3.29%. Those are positive, but not stellar results for the second year of a bull market. Standard & Poor's is predicting a year-over-year gain of about 9% for the S&P 500 in 2004. "We're behind in our bogey" so far this year, Stovall noted. Factors unsettling investors include higher interest rates, oil price hikes, terrorism, and the presidential elections.

The market's unease also seems to have diminished average returns for domestic equity funds in the second quarter. All U.S. stock fund categories showed modest average gains for the period, save small-cap growth funds, which were down 0.51%. The average domestic equity fund rose 0.91% in the second quarter. The "neutral, range-bound market" for the period stems from investor concerns about inflation, rising interest rates, and geopolitical developments, said Rosanne Pane, Standard & Poor's mutual fund strategist.

Losses for small-cap growth funds in the second quarter reflect investor apprehension over higher interest rates, Stovall said. Smaller companies may be some of the first to be affected by higher costs of capital, he notes. From a growth fund standpoint, Stovall says a rotation into the large-cap arena is underway.

"We're finding more opportunities in the larger-cap space," said Scott Moore, manager of American Century Value/Inv (TWVLX). His fund invests in stocks of all sizes. Moore feels large-cap stocks may be relatively more attractive because of small- and mid-cap outperformance in recent years. Despite that, he is currently finding potential investments across the market-cap spectrum, particularly in industrial stocks. A large-cap value portfolio, American Century Value has risen 6.2% so far this year.

"Investors will probably move more money into larger-cap stocks in the near term," said Mike Balkin, manager of William Blair Small Cap Growth/A (WBSAX). Although Balkin expects small-cap stocks will still offer opportunities, he believes they won't outperform large caps "to the same degree as last year." A small-cap value fund, William Blair Small Cap Growth was up 11.5% so far this year.

Outlook

While second-quarter results suggest weakness, the broad market is likely to finish the year higher, albeit at a less than previously expected gain, Stovall said. Standard & Poor's Investment Policy Committee forecasts the S&P 500 will rise to 1210 by the end of 2004, down from its previous forecast of 1215. Stovall says this pullback is due to risks from higher interest rates.

A strong economy will spur solid increases in corporate earnings, Stovall noted. The Investment Policy Committee projects a 20% earnings rise in 2004 for the S&P 500, a 23% earnings increase for the S&P MidCap 400, and a 34% rise in earnings for the S&P SmallCap 600.

J. Michael Barron, CEO of Knott Capital Management, subadvisor for the Quaker Capital Opportunities Fund/A (QUKTX), is also optimistic about the economy. "We expect the economy to continue to recover this year, with moderate growth and strong corporate profits," Baron said. A large-cap blend offering, Quaker Capital Opportunities Fund has risen 8.2% so far this year.

Looking head, the economy is likely to improve, but the pace is unclear, believes Matt Hart, manager of Van Kampen Small Cap Growth/A (VASCX). The "wild cards" are the presidential election and the Middle East situation, he notes. As a result, he's avoiding major sector bets. Van Kampen Small Cap Growth has risen 10.9% so far this year.

"We are finding more common stock value overseas in Japan, Hong Kong, and Sweden," said Martin Whitman, manager of Third Avenue Value Fund (TAVFX), a domestic equity fund with some overseas exposure. The fund's picks include Toyota Industries and Investor AB. "If you are not price conscious, it is difficult to get good performance," Whitman said.

Fund Investment Style Average Returns
Mid-Year 2004 (%)
Large-Cap Growth +2.48
Large-Cap Value +3.49
Large-Cap Blend +2.98
Mid-Cap Growth +4.67
Mid-Cap Value +6.33
Mid-Cap Blend +5.76
Small-Cap Growth +3.37
Small-Cap Value +7.49
Small-Cap Blend +6.82
Domestic Equity Funds* +3.99
S&P 500-Stock Index +3.29
Fund Investment Style Average Returns
Mid-Year 2004 (%)
Large-Cap Growth +2.48
Large-Cap Value +3.49
Large-Cap Blend +2.98
Mid-Cap Growth +4.67
Mid-Cap Value +6.33
Mid-Cap Blend +5.76
Small-Cap Growth +3.37
Small-Cap Value +7.49
Small-Cap Blend +6.82
Domestic Equity Funds* +3.99
S&P 500-Stock Index +3.29
Domestic Equity Funds* -- Mid-Year 2004 Returns Through 6/30/04
Best Performers Returns (%) Wost Performers Returns (%)
Large-Cap Growth MassMutual Instl Aggressive Growth/Y (MAGYX) +11.5 Boyle Marathon Fund (BFUNX) -5.7
Large-Cap Value PIMCO PEA Value/Ist (PDLIX) +10.3 Hennessy Total Return Fund (HDOGX) -2.2
Large-Cap Blend Alpine Dynamic Dividend Fund (ADVDX) +11.0 AXA Prem Large Cap Growth/Z -5.1
Mid-Cap Growth Loomis Sayles Aggressive Growth/Instl (LSAIX) +11.8 Grand Prix Fund/A (GPFFX) -26.4
Mid-Cap Value Third Avenue Value Fund (TAVFX) +11.4 Neuberger Berman Focus/Advisor (NBFAX) -2.9
Mid-Cap Blend ABN AMRO Mid Cap Fund/N (CHTTX) +13.1 Van Wagoner Growth Opportunities Fund (VWGOX) -2.5
Small-Cap Growth Credit Suisse Instl Small Cap Growth (WISCX) +29.2 Thurlow Growth Fund (THRGX) -25.3
Small-Cap Value Pacific Advisors: Small Cap Fund/A (PASMX) +18.8 Corbin Small Cap Value Fund (CORBX) -15.7
Small-Cap Blend Strong Small Company Value Fund (SCOVX) +16.3 1st Source Monogram Special Equity Fund (FMSPX) -3.9
Domestic Equity Funds* -- Second Quarter 2004 Returns
Best Performers Returns(%) Worst Performers Returns(%)
Large-Cap Growth TCW Galileo Select Equities Fund/I (TGCEX) +7.2 Shepherd Large Cap Growth Fund (DOIGX) -10.2
Large-Cap Value Seligman Large Cap Value/A (SLVAX) +4.4 Rochdale Dividend and Income Portfolio (RIMHX) -3.3
Large-Cap Blend Franklin Custodian Fds:Growth Series/Adv (FCGAX) +5.9 Marketocracy Masters (MOFQX) -8.4
Mid-Cap Growth Loomis Sayles Aggressive Growth/Instl (LSAIX) +7.3 Frontier Equity Fund Portfolio (FEFPX) -15.6
Mid-Cap Value WM Mid Cap Stock/A (WMCAX) +4.7 Neuberger Berman Focus/Advisor (NBFAX) -10.6
Mid-Cap Blend TCW Galileo Growth Eq/I (TGGEX) +5.2 Fountainhead Special Value Fund (KINGX) -5.1
Small-Cap Growth Credit Suisse Instl Small Cap Growth (WISCX) +20.2 Thurlow Growth Fund (THRGX) -10.1
Small-Cap Value UMB Scout Small Cap Fund (UMBHX) +10.3 Corbin Small Cap Value Fund (CORBX) -6.9
Small-Cap Blend ING Small Cap Value/Q +7.4 MassMutual Instl Small Company Growth/N (MMCNX) -5.5

*Excluding sector and balanced funds.

Source: Standard & Poor's. Total returns include reinvested dividends. Data as of 6/30/04.

Contact Robert F. Keane with questions or comments at:

bkeane@ia-mag.com.

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