Domestic Equity Funds -- February 2005 Review

Out Like a Lion

March 3, 2005 -- February went out like a lion for the Northeast and financial markets alike. After a weak start in January, domestic stock funds rebounded to the upside in February, rising 2.0% on average. The advance was led blue chips, which showed robust gains amidst solid economic growth and strong earnings.

"February's performance was helped in part by a fairly successful conclusion to the elections in Iraq followed by some bargain-hunting by traders who felt that markets were oversold in January," explains Sam Stovall, chief investment strategist at Standard & Poor's. "In addition, markets were bolstered in February by reports that the economy was not overheating, and that inflation was not likely to be accelerating."

The blue-chip NYSE Composite Index and the Dow Jones climbed 3.3% and 2.6%, respectively, for the month, while the S&P 500 Index gained 2.1%. The tech-heavy Nasdaq Index, however, lost another 0.5%, despite a recent surge in semiconductors. According to Standard & Poor's Investment Policy Committee, investors continue to avoid large-cap technology stocks.

Mark Arbeter, Standard & Poor's chief technical analyst, pointed out that the S&P 500 and DJIA indices benefitted particularly from outperformance in the energy sector, which was buoyed by continued high crude oil prices, as well as from strength in more defensive and cyclical areas like materials, industrials and utilities.

Generally speaking, "growth" didn't keep pace with "value" in February. Value-oriented portfolios rose 2.8%, followed by blend portfolios with a 2.2% gain, and growth portfolios, which edged up 1.6%. Overall, mid-cap value represented the best-performing fund category for the month, rising 3.2%.

"Small- and mid-cap equity funds are continuing to show strength," says Phil Edwards, managing director of fund research at Standard & Poor's. "The question is, how long will this last considering that U.S. markets are in the third year of a recovery?"

Despite the recent gains enjoyed by the broad equity markets, investors remain rattled by a handful of negative factors, including lofty oil prices. (February's cold weather in the Northeastern U.S. and Western Europe drove the cost of crude to a four-month high above the $52-per-barrel mark); the Federal Reserve's commitment to raising interest rates; and continued geopolitical turmoil in the Middle East.

Noting that inflation does not appear to be a concern now, Standard & Poor's IPC expects the Fed Funds rate, hiked to 2.50% in early February, to reach 4.00% by the end of the year. Meanwhile, The S&P 500 Index should rise to 1300, a 7.5% gain from current levels.

The best performing individual fund for February, CGM Focus Fund (CGMFX), a small-cap value offering, rose 13.6%. Another CGM portfolio, the CGM Capital Development Fund (LOMCX), topped the mid-cap value category with a 12.4% gain in February. The Hennessy Fund family ended February with the two best performers in the mid- and small-cap growth categories: Hennessy Focus 30 (HFTFX) returned 8.8% for the month, and Hennessy Cornerstone Growth Fund (HFCGX) rose 7.6%.

Below is a list of the best- and worst-performing domestic stock funds according to style category for the month of February.

Fund Investment Style

February 2005 Average Returns (%)

Large Cap Growth

+0.93

Large Cap Value

+2.82

Large Cap Blend

+1.96

Mid Cap Growth

+1.84

Mid Cap Value

+3.18

Mid Cap Blend

+2.41

Small Cap Growth

+1.73

Small Cap Value

+2.64

Small Cap Blend

+2.27

All Cap Growth

+1.75

All Cap Value

+2.71

Domestic Equity Funds*

+2.01

S&P 500-Stock Index

+2.10

Domestic Equity Funds* -- February 2005 Returns

Best Individual Performer

Returns (%)

Worst Individual Performer

Returns (%)

Large Cap Growth

Van Kampen Exchange Fund (ACEHX)

+7.6

Salomon Brothers Large Cap Growth/C (SALCX)

-3.4

Large Cap Value

Amana Mutual Funds Trust Income (AMANX)

+6.9

Pioneer Value Fund/B (PBOTX)

-2.1

Large Cap Blend

Rydex Dynamic Funds:Long Dynamic Dow 30/H (RYCVX)

+5.5

Rydex Dynamic Funds:Tempest 500 Fund/C (RYCBX)

-4.0

Mid Cap Growth

Hennessy Focus 30 (HFTFX)

+8.8

Wells Fargo Funds:Montgmry Mid Cap Growth/B (WFMBX)

-2.4

Mid Cap Value

CGM Capital Development Fund (LOMCX)

+12.4

Legg Mason Eq Tr:Special Investment/Prim (LMASX)

-2.1

Mid Cap Blend

Fidelity Leveraged Company Stock (FLVCX)

+7.4

Rydex:Inverse Mid Cap/C

-3.3

Small Cap Growth

Hennessy Cornerstone Growth Fund (HFCGX)

+7.6

Apex Mid Cap Growth Fund (BMCGX)

-4.1

Small Cap Value

CGM Focus Fund (CGMFX)

+13.6

Tocqueville Small Cap Value Fund (TSCVX)

-4.8

Small Cap Blend

Bridgeway Fund:Micro-Cap Limited Fund (BRMCX)

+8.2

ProFunds:UltraShort Small Cap/Service (UCPSX)

-3.5

All Cap Growth

Bridgeway Fund:Aggressive Investors/1 (BRAGX)

+7.3

New York Equity Fund (NYSAX)

-4.6

All Cap Value

Leuthold Select Industries Fund (LSLTX)

+7.8

Legg Mason Opportunity Trust/Prim (LMOPX)

-1.5

*Excluding sector and balanced funds.

Source: Standard & Poor's. Total returns include reinvested dividends. Preliminary data as of 2/28/05.

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

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