Ten Largest Funds -- Year-End 2002 Review

Jan. 17, 2003 — Apparently, the big guys take risks sparingly.

For most of last year, the ten-largest funds generally stayed defensive. A cautious stance may have helped them in 2002 since they all outpaced their respective peer group. The ten largest also outperformed their peers in the fourth quarter, although the group’s two fixed-income offerings saw lower gains as the bond market slowed and the stock market rallied.

The most noticeable sign of investor caution in the ten- largest lineup last year is highlighted by the addition of two bond funds to the list, PIMCO Funds:Total Return Fund/Instl (PTTRX) and Vanguard GNMA (VFIIX), and one balanced fund, Income Fund of America/A (AMECX).

PIMCO Total Return was last year’s top-selling mutual fund as investors sought shelter from the bear market in stocks, evidenced by the S&P 500′s 22.1% decline in 2002. Although investors may have been drawn in by PIMCO Total Return’s high-profile manager, Bill Gross, the fund also has a relatively less volatile focus: intermediate-term high-quality bonds.

Income Fund of America also followed a generally moderate approach with its 57.0%/32.4% mix of stocks and bonds as of December 31. Standard & Poor’s data indicates that roughly half of the Income fund’s performance last year stemmed from value stocks, and roughly half from corporate bonds. The fund’s equity holdings are apparently diversified. The five largest industry weightings ranged from 5.3% (banks) down to 3.5% (real estate) as of December 31.

Fidelity Contrafund (FCNTX) is also relatively less volatile, as reflected in the fund’s lower standard deviation (12.6%), versus that of its large-cap growth fund peers (23.81%). Manager William Danoff apparently takes a moderate approach towards trading with turnover at 88% annually, according to Fidelity, and apparently limits volatility by staying broadly diversified. The fund had five sector weightings greater than 13% for most of the year.

While Contrafund’s defensive posture may have helped it to avoid the steeper losses of its large-cap growth peers last year, the fund rose less than the other heavyweight large-cap growth offerings in the fourth quarter. Contrafund has sizable holdings in consumer staples and consumer discretionary stocks, which may have hurt last quarter’s returns.

The fact that value investing had better results last year shows up in the heavyweight’s two best equity performers, both large-cap value offerings: Investment Company of America Fund/A (AIVSX) and Washington Mutual Investors Fund/A (AWSHX). Still, these portfolios could not escape the category’s double-digit losses last year. None of Investment Company of America’s ten largest positions as of December 31 posted gains last year, while just two of Washington Mutual’s ten largest holdings had positive returns: Bank of America (BAC) and Wells Fargo (WFC).

Ten Largest FundsInvestment StyleFourth Quarter 2002 Returns (%)2002 Returns (%)

Fidelity Magellan (FMAGX) Large-Cap Growth+7.5%-23.7%

Vanguard 500 Index/Inv (VFINX) Large-Cap Blend+8.4%-22.2%

Investment Company of America Fund/A (AIVSX) Large-Cap Value+7.8%-14.5%

Washington Mutual Investors Fund/A (AWSHX) Large-Cap Value+8.0%-14.9%

PIMCO Total Return Fund/Instl (PTTRX) Intermediate-Term High-Quality+2.5%+10.2%

Growth Fund of America/A (AGTHX) Large-Cap Growth+6.9%-22.0%

Fidelity Contrafund (FCNTX) Large-Cap Growth+1.2%-9.6%