November 2, 2004

Domestic Equity Funds -- October 2004 Review

'The Bull Market is Intact'

Nov. 1, 2004 -- Despite worldwide challenges, U.S. stock fund returns are holding up well this year as investors appear to be making the best of the situation by focusing on reasonably priced stocks, particularly mid and small caps.

Through October, domestic equity funds have risen 2.62%, according to preliminary data from Standard & Poor's. Small-cap value funds have had the strongest performance among domestic equity fund categories, gaining 7.9% so far this year.

Looking past the difficulties, investors are seeing some positive signs, such as attractive valuations in certain market segments, and the Federal Reserve's "good job of telegraphing their interest-rate policy," said Sam Stovall, chief investment strategist at Standard & Poor's. A pull back in oil prices has also led to market gains in recent weeks.

History is also on the side of the current bull market, Stovall noted. Out of the 11 second-year bull markets since 1942, the S&P 500 has risen all 11 times, according to Stovall. The second year of the current bull market ended on October 8, 2004, posting a below-average increase of 8%.

The market's modest gain this time may, paradoxically, bode well for next year. Of the 10 third-year bull markets since 1942, three of the four that were preceded by single-digit second year advances posted double-digit gains in the subsequent year, Stovall noted.

Guarded Outlook for 2005

"We think the bull market is intact, and we expect the S&P 500 to advance in the mid to high single digits in 2005," said S&P's Stovall. Standard & Poor's investment policy committee projects the S&P 500 will close at 1150 at year-end 2004, 1200 at mid-year 2005, and 1220 at year-end 2005. The index closed at 1129.79 last Friday.

David Lettenberger, manager of First American Mid Cap Growth Opport/A (FRSLX), thinks investors shouldn't expect a "huge" market in 2005, and that 5% to 10% gains are likely. He expects that high energy prices will limit consumer spending, which will slow economic growth.

"Consensus expectations are for slower growth next year, not a grinding halt," said Bill D'Alonzo, manager of Brandywine Blue Fund (BLUEX). Alonzo said it is "pretty clear" that the market hasn't kept pace with earnings growth so far this year. Classified as a large-cap blend fund by Standard & Poor's, Brandywine Blue has risen 7.2% this year through last month.

Earnings growth is beginning to slow, according to David Scott, co-manager of Chase Growth Fund (CHASX). Going forward, he predicts "modest gains as the most likely scenario." A large-cap growth offering, Chase Growth rose 8.9% this year through Friday.

Looking ahead, "you don't have big tail winds," said David Decker, manager of Janus Contrarian Fund (JSVAX). Since there aren't major anomalies in current valuations, he said 2004 has been a stock picker's year. A large-cap value fund, Janus Contrarian rose 8.5% this year through October.

Choosing Between Large and Small Caps

With modest gains likely next year, investors may benefit from careful choices in the domestic equity universe. Earnings are likely to decelerate across the board next year, with mid- and large-cap growth stocks, and small-cap value stocks, showing better relative earnings growth in 2005, Stovall predicts.

While several trends are likely to affect market movements next year, "investors generally get nervous in the latter stages of a bull market, and start to wonder when the next recession will occur," Stovall said. As a result, they are likely to increasingly focus on valuations and earnings. Large-cap stocks typically outperform in the later stages of bull markets, as investors seek less volatile issues after bidding up more risky small-cap investments.

So far this year, small-cap stocks may be benefiting from better earnings prospects and attractive valuations relative to larger-cap stocks. "Investors may be saying, 'why give up on small-caps since their earnings are expected to be strong and valuations aren't out of line,'" Stovall said. Of the 111 companies currently carrying 5-Star rankings by Standard & Poor's equity analysts, 8% are small caps, 44% are mid caps, and 48% are large caps.

"The small-cap run isn't over as many pundits are saying," said Paul Kleinaitis, manager of Harris Insight Fds Small Cap Opport/A (HSCZX). He thinks gains from new products can lead to disproportionately higher gains for smaller companies since they start from a smaller base. A small-cap growth offering, Harris Insight Small-Cap Opportunity Fund rose 11.1% this year through last month.

There's currently "little disparity" in stock valuations based on market cap sizes, said Rick Dillon, co-manager of Diamond Hill Small Cap/A (DHSCX). Going forward, he sees "a slight advantage for value stocks, and a slight advantage for small-cap stocks." A small-cap value fund, Diamond Hill Small-Cap Fund was up 15.2% this year through October.

Fund Investment Style

Average Returns 2004 Through 10/29/04 (%)

Large-Cap Growth

-0.51%

Large-Cap Value

+4.14%

Large-Cap Blend

+1.82%

Mid-Cap Growth

+2.61%

Mid-Cap Value

+7.29%

Mid-Cap Blend

+5.30%

Small-Cap Growth

+0.06%

Small-Cap Value

+7.90%

Small-Cap Blend

+6.27%

All-Cap Growth

+0.65%

All-Cap Value

+4.49%

Domestic Equity Funds*

+2.62%

S&P 500-Stock Index

+2.93%

Fund Investment Style

Average Returns October 2004 (%)

Large-Cap Growth

+1.63%

Large-Cap Value

+1.16%

Large-Cap Blend

+1.32%

Mid-Cap Growth

+2.68%

Mid-Cap Value

+1.31%

Mid-Cap Blend

+1.85%

Small-Cap Growth

+2.50%

Small-Cap Value

+1.14%

Small-Cap Blend

+1.67%

All-Cap Growth

+1.71%

All-Cap Value

+1.19%

Domestic Equity Funds*

+1.63%

S&P 500-Stock Index

+1.40%

Domestic Equity Funds* -- 2004 Returns Through 9/30/04

Best Performers

Returns

Worst Performers

Returns

Large-Cap Growth Vanguard Capital Opportunity/Admrl (VHCAX)(%) +11.0% Ehrenkrantz: Growth -17.3%
Large-Cap Value Philadelphia Fund (PHILX)(%) +15.1% Strong Dow 30 Value Fund (SDOWX) -4.8%
Large-Cap Blend Fidelity Advisor New Insights/Instl (FINSX) +10.8% Prudent Bear Fund (BEARX) -10.4%
Mid-Cap Growth Morgan Stanley Capital Opportunity Trust/A (CPOAX) +12.5% Ameritor Investment Fund (AIVTX) -32.4%
Mid-Cap Value FMI Sasco Contrarian Value Fund (FMIVX) +16.7% Legg Mason Eq Tr: Special Investment/Prim (LMASX) -2.2%
Mid-Cap Blend Diversified Inv Adv Mid Cap Value/Ist (DIMVX) +13.7% Phoenix-Sen: Mid Cap EDGE/A (EDGEX) -4.1%
Small-Cap Growth Credit Suisse Instl Small Cap Growth (WISCX) +19.9% Thurlow Growth Fund (THRGX) -33.9%
Small-Cap Value Royce Fund Value/Inv (RYVFX) +17.2% Corbin Small Cap Value Fund (CORBX) -15.5%
Small-Cap Blend Buffalo Small Cap Fund (BUFSX) +17.6% Potomac Small Cap/Short/Investor (POSSX) -9.1%
All-Cap Growth Pax World Growth Fund (PXWGX) +12.1% Reynolds Fund (REYFX) -18.2%
All-Cap Value Third Avenue Value Fund (TAVFX) +19.2% Neuberger Berman Focus/Advisor (NBFAX) -4.7%
Domestic Equity Funds* -- October 2004 Returns

Best Performers

Returns

Worst Performers

Returns

Large-Cap Growth ProFunds: UltraOTC/Iv (UOPIX) +10.1% Rydex Dynamic Funds: Venture 100 Fund/C (RYCDX) -10.5%
Large-Cap Value Janus Contrarian Fund (JSVAX) +5.2% Parnassus Fund (PARNX) -2.1%
Large-Cap Blend Thompson Plumb Select Fund (THPSX) +5.6% Rydex Dynamic Funds: Tempest 500 Fund/C (RYCBX) -3.0%
Mid-Cap Growth Pin Oak Aggressive Stock Fund (POGSX) +6.5% Ameritor Investment Fund (AIVTX) -4.2
Mid-Cap Value CRM Mid Cap Value Fund/Instl (CRIMX) +4.2% MainStay Funds Mid Cap Value/A (MYIAX) -2.5%
Mid-Cap Blend TAMARACK Funds Mid Cap Equity/S (TMCSX) +4.2% ProFunds: Ult Sht Mid Cap/S (UIPSX) -3.5%
Small-Cap Growth MassMutual Instl Small Cap Growth Equity/Y (MSCYX) +7.6% Thurlow Growth Fund (THRGX) -4.9%
Small-Cap Value DLB Small Company Opportunities Fund (DLBMX) +6.2% Tocqueville Small Cap Value Fund (TSCVX) -2.8%
Small-Cap Blend AIM Trimark Small Companies Fund/A (ATIAX) +5.3% ProFunds:UltraShort SCp/Srv (UCPSX) -4.2%
All-Cap Growth Reynolds Fund (REYFX) +7.4% AIM Libra Fund/A (ALAFX) -1.8%
All-Cap Value Neuberger Berman Focus/Advisor (NBFAX) +4.7% Strong Multi Cap Value (SMTVX) -1.6%

*Excluding sector and balanced funds.

Source: Standard & Poor's. Total returns include reinvested dividends. Preliminary data as of 10/29/04.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.

Reprints Discuss this story
This is where the comments go.