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Domestic Equity Funds -- First Quarter 2003 Review

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April 2, 2003 — Despite the fog of war, are domestic equity funds poised for a spring thaw?

First quarter 2003 results for U.S. stocks funds may be negative, but March results look more hopeful. While several recent upticks turned out to be bear market rallies, market observers feel the latest gains may signal a broad turnaround.

“The wild card is Iraq, but we’re looking for an improving investment climate by year end, ” says Sam Stovall, Standard & Poor’s chief investment strategist. On the positive side, Stovall notes the S&P 500/Barra Growth index is down a modest 0.83% for the first quarter, suggesting that large-cap growth stocks may be spearheading market gains.

With the bear market over three-years old, Stovall thinks investors may feel the time is ripe for a turnaround. Once the war in Iraq is over, which he believes will be in about six to eight weeks, the investment picture should be brighter, and clearer. Looking past the war, many investors will focus on an improving economy and attractive valuations, Stovall said.

“Nobody is commenting on the positives, but the U.S. economy will probably be up 1% to 2% in the first quarter, and interest rates are at 40-year lows,” said Kevin Wenck, manager of Polynous Growth Fund/A (PAGFX). With inflation at record lows, Wenck feels there is little likelihood of broad market declines this year.

Doug Foreman, manager of TCW Galileo Aggressive Growth Equity Fund/I (TGMCX) said stocks have gotten “ridiculously cheap” over the last few years as fundamentals have improved in several sectors, including technology. In many cases, tech companies surviving the recession are in “better positions today than they’ve ever been,” Foreman said.

Low valuations suggest the market is entering a period of “above-average equity returns,” said Bill Nygren, manager of Oakmark Select Fund/I (OAKLX). Stock picking and asset allocation will be the key to performance over the next five years, he predicts. Oakmark Select was the seventh best-performing mid-cap value fund in the first quarter, dipping 0.5%.

Jim Oberweis, manager of Oberweis Micro-Cap Portfolio (OBMCX), said growth stocks have “fallen to exceptional values.” Over the next few years, Oberweis expects rising profits to fuel broad market gains. He predicts that the S&P 500 will rise 8% to 10% this year. Oberweis Micro-Cap was the third best-performing small-cap growth fund in the first quarter, gaining 6.5%.

Stovall forecasts that the S&P 500 will rise to 1005 this year, with the bulk of the gains occurring in the second half. Continuing from the first quarter, Stovall expects large-cap growth stocks will initially outperform in this year’s improving market. Feeling better about growth stocks, investors will focus on large companies for less volatility, he forecasts. “With size, comes stability,” Stovall said.

Large-cap companies tend to “lead the pack” coming out of a recession, said Mike Samoraj, vice president, research, for New York Equity Fund (NYSAX). The fund is focusing on large-cap stocks in the technology, financial, and health-care sectors. Current holdings include Corning Inc. (GLW), Computer Associates Intl (CA), and Verizon Communications (VZ).

Oakmark’s Nygren said he’s been adding large-cap growth stocks to his portfolio as valuations have fallen to attractive levels. AOL Time Warner (AOL) is a recent addition. Nygren feels there’s currently a lot of overlap between the growth and value style categories. As a result, he thinks focusing on particular market caps will have little effect on investment performance the next few years.

Smaller large-cap stocks currently offer the most attractive values, according to Ingrid Dyott, assistant manager of Neuberger Berman Socially Responsive/Investor (NBSRX). She said focusing on underlying growth has led the fund away from mega-cap stocks. The fund is currently overweighting financial service and energy companies. Dyott said she likes the financial services sector because “the banking system is stronger now than after the last recession.”

Fund Investment StyleAverage Returns First Quarter 2003 (%)

  • Large-Cap Growth -1.49%
  • Large-Cap Value -4.81%
  • Large-Cap Blend -3.17%
  • Mid-Cap Growth -1.66%
  • Mid-Cap Value -4.61%
  • Mid-Cap Blend-2.88%
  • Small-Cap Growth-3.86%
  • Small-Cap Value -5.32%
  • Small-Cap Blend -4.41%
  • Domestic Equity Funds*-3.30%
  • S&P 500-3.30%

Fund Investment StyleAverage Returns March 2003 (%)

  • Large-Cap Growth +1.54%
  • Large-Cap Value +0.09%
  • Large-Cap Blend +0.85%
  • Mid-Cap Growth +1.30%
  • Mid-Cap Value +0.34%
  • Mid-Cap Blend+0.98%
  • Small-Cap Growth+1.37%
  • Small-Cap Value +0.68%
  • Small-Cap Blend +1.07%
  • Domestic Equity Funds*+0.94%
  • S&P 500+0.84%

Domestic Equity Funds*

Best PerformersFirst Quarter 2003 Returns (%)Worst PerformersFirst Quarter 2003 Returns (%)

  • Large-Cap Growth New York Equity Fund (NYSAX) +11.5%Midas Special Equities Fund (MISEX) -11.0%
  • Large-Cap Value Neuberger Berman Socially Responsive/Investor (NBSRX) +1.8%PBHG Clipper Focus Fund/PBHG (PBFOX) -10.4%
  • Large-Cap Blend American Eagle Twenty Fund (AETWX) +9.5%Nations Classic Value/Inv A (NCSAX) -10.5%
  • Mid-Cap Growth TCW Galileo Aggressive Growth Equity Fund/I (TGMCX) +6.9%ProFunds: UltraMid Cap ProFund/Serv (UMPSX) -11.8%
  • Mid-Cap Value Gintel Fund (GINLX) +2.6%PIMCO PEA Renaissance Fund/A (PQNAX) -11.0%
  • Mid-Cap BlendJundt Mid Cap Growth Fund/A (JMCHX) +6.8%ING Mid Cap Value/A (IMVAX)-10.4%
  • Small-Cap GrowthApex Mid Cap Growth Fund (BMCGX) +13.9%Perkins Opportunity Fund (POFDX) -29.9%
  • Small-Cap ValuePolynous Growth Fund/A (PAGFX) +21.3%Ameristock Focused Value Fund (AMFVX) -18.0%
  • Small-Cap BlendKinetics Small Cap Opportunity Fund (KSCOX) +8.0%ING Small Cap Value/A-14.6%

Domestic Equity Funds*

Best PerformersMarch 2003 Returns (%)Worst PerformersMarch 2003 Returns (%)

  • Large-Cap Growth Morgan Stanley Instl: Focused Equity/A (MSAGX) +8.3%American Growth Fund/A (AMRAX) -3.8%
  • Large-Cap Value World New Market Fund (AVMIX) +2.5%Seligman Large-Cap Value Fund/A (SLVAX) -3.0%
  • Large-Cap Blend Scudder Quantitative Equity/Invest (DBQVX) +4.6%Fidelity Advisor Fifty/B (FFYBX) -2.8%
  • Mid-Cap Growth Rochdale Alpha Portfolio (RIMHX) +6.8%Monetta Fund (MONTX) -2.1%
  • Mid-Cap Value Meehan Focus (MEFOX) +3.9%Heartland Group: Select Value Fund (HRSVX) -3.7%
  • Mid-Cap BlendIMS Capital Value Fund (IMSCX) +4.3%Harbor Mid Cap Value/Ret (HRMVX)-2.1%
  • Small-Cap GrowthJundt US Emerging Growth Fund/A (JEGHX) +9.0%Perkins Opportunity Fund (POFDX) -8.0%
  • Small-Cap ValuePolynous Growth Fund/A (PAGFX) +10.7%Ameristock Focused Value Fund (AMFVX) -4.4%
  • Small-Cap BlendKinetics Small Cap Opportunity Fund (KSCOX) +6.2%Satuit Cap Mgmt Micro Cap Fund (SATMX)-2.6%

*Excluding sector and balanced funds.

Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 3/31/03.