Sept. 5, 2002 — With the average U.S. stock fund down 20.2% this year through August, but up a modest 0.2% last month, is the market beginning to turn around?

“I think we have bottomed,” says Bob Costomiris, manager of Strong Mid Cap Disciplined Fund (SMCDX). While some market watchers expect the market to retest its recent lows, Costomiris thinks valuations are “reasonable,” based low interest rates and little inflation. Although generally optimistic, Costomiris expects a lot of sideways movement. A mid-cap value offering, Strong Mid Cap Disciplined rose 2% last month.

The market’s recent gains signal that “the worst is behind us,” according to Peter Morris, co-manager of Homestead Small Company Stock Fund (HSCSX). An upturn may be likely, but Morris expects that stock returns will be modest in the near term. Up 4.4%, Homestead was the third-best performing small-cap value fund this year through August.

Don Taylor, manager of Franklin Managed Trust Rising Dividends Fund (FRDPX), is optimistic about equity returns because the corporate scandals, which were limited to “a few bad apples,” are fading. Taylor believes these scandals interrupted a market rebound that was beginning last May. Now that these issues have less influence on stock prices, Taylor predicts that the market will shift toward a cyclical upturn. The second-best-performing mid-cap value fund this year through last month, Franklin Rising Dividends rose 1.5%.

One constant through the market’s recent ups and downs has been stronger results among mid- and small-cap funds. An interesting development is the better relative performance of blend offerings in the smaller-cap space. While investors may still favor smaller-cap stocks because of their more attractive valuations, a shift from pure value plays to a blend of growth and value styles suggests cautious optimism, since growth-oriented investments tend to do better as the economy improves.

Strong’s Costomiris feels it isn’t likely that a stronger economy will favor large-cap companies, so he expects that mid- and small-cap value stocks “should at least hold onto their relative gains of the last couple of years.”

Value stocks will likely outpace growth stocks in the near term because value stocks are still so attractively priced that “there is no reason to go to the roulette table” with growth stocks,” said Neil Hennessy, manager of Hennessy Cornerstone Growth Fund (HFCGX). With growth stocks, Hennessy feels investors are “betting on something that might or might not happen” since the economic outlook is uncertain. A small-cap growth portfolio, Hennessy Cornerstone Growth Fund was up 2.2% this year through August.

Fund Investment Style2002 Returns Through 8-30-02 (%)

Large-Cap Growth Average-24.30

Large-Cap Value Average-16.40

Large-Cap Blend Average-19.94

Mid-Cap Growth Average-23.93

Mid-Cap Value Average-12.29

Mid-Cap Blend Average-18.65

Small-Cap Growth Average-27.49

Small-Cap Value Average-10.23

Small-Cap Blend Average-18.25

Domestic Equity Funds Average*-20.21

S&P 500-19.53

Fund Investment StyleAug. 2002 Returns (%)

Large-Cap Growth Average+0.12

Large-Cap Value Average+0.66

Large-Cap Blend Average+0.45

Mid-Cap Growth Average-0.66

Mid-Cap Value Average+0.72

Mid-Cap Blend Average+3.62

Small-Cap Growth Average-0.32

Small-Cap Value Average+0.23

Small-Cap Blend Average+0.38

Domestic Equity Funds Average*+0.22

S&P 500+0.49

Domestic Equity Funds*Best Perf.2002 Ret. Through 8-30-02 (%)Worst Perf.2002 Ret. Through 8-30-02 (%)

Large-Cap GrowthMillennium Growth Fund (MGFQX) -0.4Pin Oak Aggressive Stock Fund (POGSX) -46.8

Large-Cap ValueVontobel US Value Fund (VUSVX) +1.9Citizens Value Fund/Retail (MYPVX) -38.9

Large-Cap BlendHancock Horizon Value Fund/Trust (HHGTX) +1.5Alpha Select Tgt Sel Eq/I-41.8

Mid-Cap GrowthPrincipal MidCap/A (PEMGX) -6.4Van Wagoner Mid-Cap Growth Fund (VWMDX) -46.9

Mid-Cap ValueFederated Market Opportunity Fund/A (FMAAX) +2.6Dreyfus Growth & Value Fds:Midcap Value Fd (DMCVX) -33.1

Mid-Cap BlendYacktman Focused Fund (YAFFX) +11.3MFS Institutional Mid-Cap Growth Fund (MCGEX) -45.6

Small-Cap GrowthAmerican Heritage Fund (AHERX) 0.0Van Wagoner Post-Venture Fund (VWPVX) -64.5

Small-Cap ValueRoyce Special Equity (RYSEX) +12.5Polynous Growth Fund/A (PAGFX) -46.0

Small-Cap BlendLeuthold Grizzly Short Fund (GRZZX) +19.3ASAF ProFund Managed OTC Fund/A (PRMAX)-49.2

Domestic Equity Funds*Best Perf.Aug. 2002 Ret. (%)Worst Perf.Aug. 2002 Returns (%)

Large-Cap GrowthNew York Equity Fund (NYSAX) +13.3Pin Oak Aggressive Stock Fund (POGSX) -6.5

Large-Cap ValueYorktown Classic Value Trust (YCVTX) +4.2Parnassus Fund (PARNX) -2.8

Large-Cap BlendAmerican Eagle Large Cap Growth Fund (AELGX) +6.6RNC Equity Fund (RNCEX) -8.1

Mid-Cap GrowthDuncan-Hurst Aggressive Growth Fund/R (DHAGX) +3.1Van Wagoner Mid-Cap Growth Fund (VWMDX) -5.2

Mid-Cap ValueGabelli Value/A (GABVX) +4.4Gintel Fund (GINLX) -3.5

Mid-Cap BlendYacktman Fund (YACKX) +9.1Alliance Mid Cap Growth Fund/A (CHCLX) -5.4

Small-Cap GrowthAmerican Heritage Fund (AHERX) +14.3Van Wagoner Post-Venture Fund (VWPVX) -9.2

Small-Cap ValueFBR Small Cap Value Fund/A (FBRVX) +5.9Weitz Series Fund:Hickory Portfolio (WEHIX) -8.5

Small-Cap BlendFidelity Leveraged Company Stock (FLVCX) +15.2IDEX Isabelle Small Cap Value/A (IIVAX) -4.1

*Excluding sector and balanced funds.

Source: Standard & Poor’s. Total returns are in U.S. dollars and include reinvested dividends. Data as of 8/30/02.