Sept. 8, 2003 — A sustained market upturn appears underway as stock funds continue to rise, our review of mutual fund performance through August shows.
“This bull market seems fairly typical,” said Sam Stovall, chief investment strategist for Standard & Poor’s. He noted that the market rebound is following past patterns, with smaller, growth-oriented stocks outperforming. An economic recovery is boosting economically sensitive sectors throughout the market, Stovall added.
Non-fundamental concerns, such as war and corporate fraud, have receded as influences on investor psychology this year, said Eileen Leary, manager of State Street Research: Mid Cap Growth Fund/A (SCFAX). These changes have led investors to focus on earnings growth and revenue growth, she said. State Street Research Mid Cap Growth rose 31.2% this year through August.
Small-cap stocks are leading so far this year because smaller companies are more likely to see stronger earnings, said Ed Vroom, manager of Reserve Private Eqty Srs Small-Cap Grth/R (REGAX). The fund was up 37.5% this year through August.
Small-cap stocks are also leading because they were deeply undervalued due to their steep declines in the recent bear market, noted Boniface Zaino, manager of Royce Fund Opportunity/Inv (RYPNX). While growth stocks have generally outperformed value stocks this year, value offerings were also poised for strong gains due to their steep lows in recent years, he said. A small-cap value offering, Zaino’s fund rose 45.3% this year through August.
While small-cap stocks have led this year, large-cap stocks have also had sizable gains because many large-cap companies showed resilience in the economic downturn, said Leigh Crawford, co-manager of TCW Galileo Select Equities Fund/I (TGCEX). “Good companies can exploit adverse conditions by increasing research and development and buying back stocks,” he added. A large-cap growth portfolio, Crawford’s fund rose 38.7% this year through August.
The recent bear market may also have fostered growth investing’s gains this year because more defensive sectors had become overvalued, said Jim Shier, manager of Security: Mid Cap Growth Fund/A (SECUX). “The price of safety was getting expensive,” Shier said. Security Mid Cap Growth gained 43.1% this year through August.
Growth stocks were also deeply undervalued due to steep declines in recent years, said Roger Harris, co-manager of Credit Suisse Emerging Growth/A (CUWAX). “Valuations for growth stocks are reasonable relative to their growth rates,” he said. A mid-cap growth offering, Credit Suisse Emerging Growth rose 33.6% this year through August.
The improving environment for growth stocks has also led to opportunities for momentum investors and investors who follow a growth at a reasonable price (GARP) approach, Harris said. Although underweight in technology, which benefited from strong momentum this year, the manager said his fund has outperformed this year because of its GARP approach.
This year’s rally has also become more broad-based due to window dressing, as some fund managers moved into this year’s strongest performing sectors, said Thyra Zerhusen, manager of ABN AMRO Mid Cap Fund/N (CHTTX). “People probably had too much in treasuries, so they shifted into equities,” she said. A mid-cap blend offering, Zerhusen’s fund was up 28.2% this year through August.
Despite this year’s strong gains, the market still enjoys upside potential, said Standard & Poor’s Stovall, who now projects a 23% full-year rise for the S&P 500 to 1085, up from a previous target of 1030. Going forward, valuations are the biggest question, he said. As a result, Stovall doesn’t expect the market to go beyond an overall price/earnings ratio of 20 times trailing operating earnings. “Investors have learned the lessons of past years — you can’t get over-extended and stay over-extended,” he said.
“A lot of opportunities may have been wrung out of the market,” said Security’s Shier. On the positive side, however, he thinks many retail investors may be encouraged by this year’s gains to increase their market exposure. Increased consumer spending could also boost the economy and the market this year, said Royce’s Zaino. Monetary and fiscal stimuli could add to these trends, Zaino said.
– Bill Gerdes
Fund Investment StyleAverage Returns 2003 Through 8/29/03 (%)
Domestic Equity Funds*+20.48%
Fund Investment StyleAverage Returns August 2003 (%)
Domestic Equity Funds*+3.23%
S&P 500+1.95 %
Domestic Equity Funds* — 2003 Returns Through 8/29/03 Best PerformersReturns (%)Worst PerformersReturns (%)
Large-Cap GrowthReynolds Fund (REYFX) +88.7%Midas Special Equities Fund (MISEX) -1.6%
Large-Cap ValueHillman Aggressive Equity Fund (HCMAX)+36.6%Rainbow Fund (RBOWX) -17.1%
Large-Cap BlendThornburg Core Growth/A (THCGX) +50.1%Howard Capital Appreciation Fund (HEFGX) +3.1%
Mid-Cap GrowthRockland Small Cap Growth Fund (RKGRX) +57.2%Ameritor Investment Fund (AIVTX) -2.6%
Mid-Cap ValueNeuberger Berman Focus/Investor (NBSSX) +48.0%Granum Value Fund (GRVFX) +8.4%
Mid-Cap BlendFidelity Leveraged Company Stock (FLVCX) +60.0%Old Westbury Capital Opportunity Fund (OWCOX) +8.1%
Small-Cap GrowthApex Mid Cap Growth Fund (BMCGX) +109.7%Frontier Equity Fund Portfolio (FEFPX) -50.0%
Small-Cap ValueDreyfus Growth & Value Fds: Small Co. Value Fd (DSCVX) +53.0%GE Small Cap Value Fund/A (GASCX) +11.6%
Small-Cap BlendOppenheimer Emerging Growth/A (OEGAX) +56.2%Credit Suisse Trust Small Cap Value (CUSVX) +13.8%
Domestic Equity Funds* — August 2003 Returns Best PerformersReturns (%)Worst PerformersReturns (%)
Large-Cap GrowthReynolds Fund (REYFX) +10.7%American Eagle Capital Appreciation Fund (AECAX) -4.8%
Large-Cap ValueJanus Special Equity Fund (JSVAX) +6.9%Rainbow Fund (RBOWX) -5.5%
Large-Cap BlendABN AMRO Veredus Select Growth Fund/N (AVSGX) +6.7%Jundt Twenty-Five Fund/A (JTFHX) -3.9%
Mid-Cap GrowthShaker Fund/A (SHKAX) +12.8%Jundt Mid Cap Growth Fund/A (JMCHX) -2.7%
Mid-Cap ValueNeuberger Berman Focus/Investor (NBSSX) +10.8%Diamond Hill Focus/A (DIAMX) -1.7%
Mid-Cap BlendVan Wagoner Growth Opportunities Fund (VWGOX)+7.8%Fountainhead Special Value Fund (KINGX) +0.4%
Small-Cap GrowthFranklin Strategic Srs: Sm Cap Growth II/A (FSGRX) +9.8%Frontier Equity Fund Portfolio (FEFPX) -7.1%
Small-Cap ValueCGM Focus Fund (CGMFX) +9.2%Texas Capital Value Fds: Value & Growth Port (TCVGX) +0.5%
Small-Cap BlendFidelity Value Strategies/Initial (FSLSX) +9.9%Diamond Hill Small Cap/A (DHSCX) +2.2%
*Excluding sector and balanced funds.
Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 8/29/03.