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Domestic Equity Funds -- May 2003 Review

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une 4, 2003 — It’s not back to the races, but market gains are taking hold, according to several fund managers. “Investors are no longer comfortable being defensive — the worst is behind us,” said Sally Anderson, manager of Kopp Emerging Growth Fund/A (KOPPX).

This year through May, market gains have been broad based, given that most domestic-equity fund categories show double-digit gains, with the exception of large-cap value, up a still respectable 9.6%. Small-cap growth funds enjoy the highest average gains so far this year, followed by mid-cap growth funds. As many predicted, these two categories have outperformed so far as investors felt comfortable taking on more risk as the economy improved.

Favorable government policy is ‘key’ to a rising market, said Laura Granger, manager of Oppenheimer Emerging Growth/A (OEGAX). She forecasts that “the government will do everything to stimulate the economy.” Oppenheimer Emerging Growth was the third best-performing small-cap blend fund so far this year through May, gaining 24.8%.

Consumer spending will be “a big part” of a rising economy this year, said Tony Weber, manager of ABN AMRO Veredus Aggressive Growth Fund/N (VERDX). Weber also sees higher capital spending fueling stock gains this year. ABN AMRO Veredus Aggressive Growth was the sixth best-performing small-cap blend fund so far this year through May, rising 20.6%.

Companies are showing “fundamental improvement,” which bodes well for the market, said Alexander Motola, manager of Thornburg Core Growth/A (THCGX). Calling the market “pretty healthy right now,” Motola also sees strong support from the U.S. consumers, who are “remarkably resilient.” The fourth best-performing large-cap blend fund so far this year through May, Thornburg Core Growth rose 26.8%.

Walk, Don’t Run

Despite the general optimism, many fund managers caution that future gains will be measured. “Over the next several years, there will be speed limits — you can still make money, but you have to be selective,” said Kopp’s Anderson.

This year’s market will show a sustainable recovery, but “we won’t have a runaway year,” said Susan Hirsch, manager of Prudential US Emerging Growth/A (PEEAX). Hirsch predicts there will be “some recovery” due to pent-up demand for capital spending. The eight best-performing mid-cap growth fund so far this year through May, Prudential US Emerging Growth rose 22.3%.

For the rest of this year, stocks will show “mid to high single-digit growth,” said Sam Stovall, chief investment strategist at Standard & Poor’s. As a result, Stovall predicts the S&P 500 will likely reach 985 by year-end, which would be a 13% year-over-year increase.

“I would be leery of a huge advance of 20% or more being sustained” this year, said Jim Schier, manager of Security: Mid Cap Value Fund/A (SEVAX). Schier feels that global overcapacity will limit economic growth for “a long time.”

Choose Carefully

Expecting limited gains, several fund managers differ on which areas offer the greatest potential.

“I expect small-cap growth to continue to outperform as long as the economy improves,” said Oppenheimer’s Granger. She cautions that economic gains will be modest, so she’s favoring small-cap companies with attractive niche products.

Small-cap stocks tend to outperform large-cap stocks at the beginning of a market rebound, but Standard & Poor’s Stovall expects large-cap stocks will lead because of the weak dollar, which will favor large exporters, and less analytical coverage by investment firms, which will hurt smaller companies.

Technology and health-care stocks are likely to have above-average growth this year, said Kopp’s Anderson. Technology companies are likely to benefit from increased demand for their products as companies seek to improve their competitive positions, Kopp said.

A self-style bull, ABN AMRO’s Weber thinks home building will drive economic growth this year. As a result, the manager is focusing on home-building stocks, which make up 21% of his portfolio.

Predicting a normal cyclical rotation, Ron Muhlenkamp, manager of the Muhlenkamp Fund (MUHLX), is stressing housing and financial stocks. Muhlenkamp expects these areas to outperform as the economy moves out of a recession. He believes deep cyclical areas, like paper, chemical, and metals, will gain as the economy improves, but says he “can’t get excited yet” about those sectors. The Muhlenkamp Fund was the fifth best-performing large-cap value fund so far this year through May, gaining 20.0%

Industrial sectors are likely to rebound this year, as an economic recovery broadens, said Jean-Pierre Conreur, manager of Tocqueville Small Cap Value Fund (TSCVX). A deep-value investor, Conreur favors the industrial-equipment and consumer-goods areas, his two largest sector weights. Conreur also sees signs of life in telephone companies, which he says are “starting to spend money.”

– Bill Gerdes

Fund Investment StyleAverage Returns

For 2003 Through

5/30/03 (%)

Large-Cap Growth +11.29%

Large-Cap Value+9.64%

Large-Cap Blend+10.16%

Mid-Cap Growth+13.56%

Mid-Cap Value+11.37%

Mid-Cap Blend+13.08%

Small-Cap Growth+14.09%

Small-Cap Value+11.88%

Small-Cap Blend+13.04%

Domestic Equity Funds*+11.50%

S&P 500+10.34%

Fund Investment StyleAverage Returns

For May 2003 (%)

Large-Cap Growth +5.36%

Large-Cap Value+6.49%

Large-Cap Blend+5.59%

Mid-Cap Growth+8.08%

Mid-Cap Value+8.23%

Mid-Cap Blend+8.50%

Small-Cap Growth+9.54%

Small-Cap Value+8.75%

Small-Cap Blend+9.35%

Domestic Equity Funds*+6.98%

S&P 500+5.26%

Domestic Equity Funds*

Best Performers2003 Returns


5/30/03 (%)Worst Performers2003 Returns


5/30/03 (%)

Large-Cap GrowthReynolds Fund (REYFX) +54.6%Midas Special Equities Fund (MISEX) -4.1%

Large-Cap ValueYorktown Classic Value Trust (YCVTX) +23.4%Sequoia Fund (SEQUX) +2.6%

Large-Cap BlendLegg Mason Focus Trust (FOCTX) +29.5%Howard Capital Appreciation Fund (HEFGX) +3.9%

Mid-Cap GrowthLegg Mason Inv Tr: Opportunity Tr/Prim (LMOPX) +38.5%Ameritor Investment Fund (AIVTX) -2.6%

Mid-Cap ValueNeuberger Berman Focus/Investor (NBSSX) +26.6%Lord Abbett Mid Cap Value Fund/B (LMCBX) +4.3%

Mid-Cap BlendFidelity Leveraged Company Stock (FLVCX) +40.9%Old Westbury Capital Opportunity Fund (OWCOX) +2.5%

Small-Cap GrowthApex Mid Cap Growth Fund (BMCGX) +83.3%Frontier Equity Fund Portfolio (FEFPX) -38.5%

Small-Cap ValueFifth Third Micro Cap Value/Instl (MXAIX) +24.8%Navellier Performance Small Cap Value (NPSVX) +0.5%

Small-Cap BlendUndiscovered Managers Small Cap Growth/Instl (USRLX) +31.5%American Century New Opportunity II/Inv (ANOIX) +4.7%

Domestic Equity Funds*

Best PerformersMay 2003

Returns (%)Worst PerformersMay 2003

Returns (%)

Large-Cap GrowthReynolds Fund (REYFX) +28.7%Harris Insight Fds Large Cap Aggressive/B (HLCBX) -0.5%

Large-Cap ValueStrong Multi Cap Value (SMTVX) +13.5%Hilliard-Lyons Growth Fund/A (HLGRX) +1.4%

Large-Cap BlendEhrenkrantz Trust: Growth+15.1%Howard Capital Appreciation Fund (HEFGX) +0.9%

Mid-Cap GrowthAlliance Mid Cap Growth/A (CHCLX) +18.0%Van Wagoner Mid-Cap Growth Fund (VWMDX) -0.3%

Mid-Cap ValueSecurity: Mid Cap Value Fund/A (SEVAX) +18.3%Gintel Fund (GINLX) +0.2%

Mid-Cap BlendING Mid Cap Value Fund/A (IMVAX) +15.0%Eagle Growth Shares (EGRWX) +1.7%

Small-Cap GrowthKopp Emerging Growth Fund/A (KOPPX) +24.5%Frontier Equity Fund Portfolio (FEFPX) 0.0

Small-Cap ValueTocqueville Small Cap Value Fund (TSCVX) +18.0%Rainbow Fund (RBOWX) 0.0

Small-Cap BlendUndiscovered Managers Small Cap Growth/Instl (USRLX) +18.0%Heritage Series Trust MidCap Stock Fund/A (HMCAX) +3.9%

*Excluding sector and balanced funds.

Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 5/30/03.