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Domestic Equity Funds -- January 2003 Review

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Feb. 5, 2003 — The likelihood of a war with Iraq has unsettled investors this year, but a quick resolution should fuel healthy returns for the rest of 2003, according to managers of several of the best-performing funds last month.

“I think we will end the year up — few people expect a worst-case scenario for the Iraqi war,” said Jay Rushin, manager of AIM Emerging Growth Fund/A (EMEAX). Rushin believes that once an Iraqi war is over, investors will realize that President Bush’s proposed tax cuts will be “a huge positive” for consumers, the economy, and the market. AIM Emerging Growth was the fourth-best performing mid-cap blend fund in January, rising 1.0%.

Kevin Wenck, manager of Polynous Growth Fund/A (PAGFX), is also optimistic about 2003. “Assuming a positive outcome to the war, people will poke their heads out of the foxhole, and say that things aren’t so bad,” he predicts. Wenck forecasts “good” economic growth and low interest rates for the rest of the year.

After the Middle East situation eases, businesses will spend more and consumers will become more confident, forecasts Todd Ahlsten, manager of Parnassus Income Trust Equity Income Fund (PRBLX). Fiscal stimuli and tax cuts should lead to a stronger economy in the second half of 2003, Ahlsten predicts. Parnassus Equity Income Fund fell 0.8% in January.

“We think the market will have a good year,” said Christopher Baggini, manager of Gartmore US Growth Leaders/A (GXXAX). Baggini forecasts a 10% to 15% rise for the S&P 500 in 2003. Baggini’s fund was the six-best performing large-cap blend fund last month, gaining 2.0%.

After the Iraqi situation improves, investors and corporations will focus on a recovering economy, said Sam Stovall, Standard & Poor’s chief investment strategist. As in past rebounds, Stovall expects that value stocks will outperform growth stocks because the value segment of the market has more high-beta stocks. Typically, more volatile investments outperform in rising markets as investors take on more risk, Stovall said.

For the balance of 2003, Stovall expects large-cap stocks will outperform mid- and small-cap stocks because a weak dollar will boost multinationals, which generally are larger companies. Stovall also feels dividend tax reform will favor large-cap stocks since about 70% of companies in the S&P 500 pay a dividend, versus about 40% of companies in the S&P 600 Small Cap Index.

Parnassus’ Ahlsten said he expects gains for large-cap companies this year, such as Costco Wholesale (COST), American Express (AXP), and BANK ONE Corp. (ONE). In general, however, he’s avoiding big sector bets until the geopolitical situation eases.

Large-cap stocks, including some high-quality technology issues, look appealing, said AIM’s Rushin. As in past upturns, higher-quality large-cap stocks will rebound first, followed by small- and mid-cap stocks, Rushin predicts.

Gartmore’s Baggini also sees upside potential for technology companies, particularly those gaining market share. He particularly likes leading software companies, such as SAP AG ADS (SAP) and Microsoft Corp. (MSFT).

Value stocks don’t look compelling, added Wenck of Polynous Growth. Wenck predicts investors will shift toward growth stocks during 2003 as they realize that the market has bottomed.

So far this year, value investments have lagged because they include tech and telecom stocks, which continue to suffer, said Stovall. These categories have been hurt by low economic growth, which has also hit small-cap stocks, he said. Investors have avoided smaller companies, fearing they will suffer more than large companies if the economy doesn’t turn around, Stovall noted.

Fund Investment StyleAverage Returns January 2003 (%)

  • Large-Cap Growth-1.99%
  • Large-Cap Value-2.45%
  • Large-Cap Blend-2.38%
  • Mid-Cap Growth-1.58%
  • Mid-Cap Value-2.75%
  • Mid-Cap Blend-1.74%
  • Small-Cap Growth-2.35%
  • Small-Cap Value-2.84%
  • Small-Cap Blend-2.61%
  • Domestic Equity Funds*-2.27%
  • S&P 500-2.61%

Domestic Equity Funds*

Best PerformersJanuary 2003 Returns (%)Worst PerformersJanuary 2003 Returns (%)

  • Large-Cap GrowthJundt Opportunity Fund/A (JOPHX) +7.8%Midas Special Equities Fund (MISEX) -8.4%
  • Large-Cap ValueICAP Select Equity (ICSLX) +1.8%Sequoia Fund (SEQUX) -5.7%
  • Large-Cap BlendAmerican Eagle Twenty Fund (AETWX) +7.0%ICON Core Equity/C (ICNCX) -6.7%
  • Mid-Cap GrowthTCW Galileo Aggressive Growth Equity Fund/I (TGMCX) +2.6%T O Richardson Sector Rotation Fund (TRSRX) -5.8%
  • Mid-Cap ValueGintel Fund (GINLX) +1.5%PIMCO PEA Renaissance Fund/A (PQNAX) -6.3%
  • Mid-Cap BlendJundt Mid Cap Growth Fund/A (JMCHX) +4.9%Wayne Hummer Growth (WHGRX) -5.1%
  • Small-Cap GrowthAmerican Heritage Fund (AHERX) +14.3%RS Investment Trust: Diversified Growth/A (RSDGX) -10.1%
  • Small-Cap ValuePolynous Growth Fund/A (PAGFX) +7.2%Corbin Small Cap Value Fund (CORBX) -7.7%
  • Small-Cap BlendShaker Fund/Intermediary Shares (SHKIX) +2.7%ProFunds:Ultra Small Cap/Serv (UAPSX) -6.3%
  • *Excluding sector and balanced funds.

Source: Standard & Poor’s. Total returns are in U.S. dollars and include reinvested dividends. Data as of 1/31/03.