March 4, 2004 — The party wasn’t over last month, but investors have apparently decided to avoid racier fare, according to domestic equity fund returns so far this year.
“In February, investors pulled back from the more aggressive styles that dominated returns over the past year and into January,” said Rosanne Pane, mutual fund strategist for Standard & Poor’s. Investors are now focusing on consistent earnings at attractive prices, she noted.
Signaling the market’s greater concern about valuations, value funds have led so far this year across all market capitalization categories. While returns were solid across domestic equity fund styles, value funds’ outperformance is somewhat atypical for the second year of a bull market, when growth investing generally leads.
February was marked by a rotation into deeper cyclical issues, particularly into materials, energy, and consumer staples, said Sam Stovall, chief investment strategist for Standard & Poor’s. Investors are likely focusing on energy and materials as a hedge against inflation, Stovall noted. The interest in consumer staples may be due to investors’ concerns about a possible interest rate hike, Stovall said.
What Your Peers Are Reading
Investor caution also likely stems from the sharp losses of the recent bear market, said Diane Jaffee, manager of TCW Galileo Diversified Value Fund/N (TGDVX). The bear market losses were “too huge for people to ignore,” she added.
Unusual for the second year of a bull market, investors are continuing to favor smaller-cap issues, with small-cap funds leading so far this year, and mid-cap funds leading in February. Investors may be shifting to less aggressive value issues, but they’re still looking for growth by favoring smaller-cap issues.