Sept. 1, 2004 — Facing many challenges, domestic equity funds are playing defense this year, turning to large-cap value offerings to hold the fort. In short, the market is shifting to large, high-quality, dividing-paying companies to help limit downside amid economic and political uncertainty.
“Investors continue to take a defensive approach as they face rising interest rates, lower earnings, high oil prices, and terrorist activity,” said Sam Stovall, chief investment strategist at Standard & Poor’s. In particular, they are focusing on dividend-paying stocks to “get paid while they wait,” he noted. Year-to-date through August 20, dividend-paying stocks in the S&P 500-stock index gained 4.2%, versus a decline of 8.4% for the index’s non-dividend-paying stocks.
Market difficulty is reflected by the fact that the average domestic equity fund has shed 1.72% year-to-date through August. The broad market is doing moderately better, with the S&P 500 gaining 0.25% for the period. So far this year, value offerings are leading. The mid- and small-cap value are the two best-performing domestic equity fund categories. August’s returns show movement up the market-cap spectrum as mid-cap value held up better for the month, and large-cap value best of all.
Investors apparently view larger-cap companies as likely to benefit from the lower dollar and the mature economic cycle. Compared with small-cap companies, larger-cap companies are more likely to pay dividends, to be bigger exporters, and to have supply contracts that lessen raw material costs,Stovall noted.
Investors are generally facing negative returns this year since the higher capital spending they had expected didn’t occur, according to Ron Sloan, manager of AIM Charter Fund/I (CHTVX). “A lot of folks probably thought we’d have a significant capital spending recovery this year,” he said. As a result, many growth-oriented companies, particularly in technology, have had a difficult time.
Small-cap companies have also suffered this year from greater competition from large-cap companies, Sloan said. When growth slows, larger companies can favor their stronger operations, while smaller companies, which frequently have only one product line, have less flexibility, he noted. AIM Charter, a large-cap growth fund, is up 0.7% so far this year.
Having outperformed since 1999, small-cap stocks are no longer as undervalued vis-a-vis large caps, said Gary Miller, co-manager of Victory Small Company Opportunity/A (SSGSX). “The low hanging fruit is probably gone,” he said of small-cap stocks. At some point, attractive valuations will spur large-cap stocks, except for mega-cap stocks, to market leadership, Miller predicts. A small-cap value offering, Victory Small Company Opportunity is up 7.6% so far this year.
Value funds are outperforming because cyclical industrial stocks tend to be value-oriented, said Howard Hansen, co-manager of Lord Abbett Mid Cap Value Fund/A (LAVLX). “Growth investors have a hard time buying fertilizer companies,” he said. The co-manager added that his fund is benefiting this year from materials and processing and consumer discretionary holdings. Lord Abbett Mid Cap Value has gained 6.6% so far this year.
“You have to have companies that have earnings,” said Kimberly Scott, manager of Waddell & Reed Advisors New Concepts Fund/A (UNECX), a mid-cap growth offering. Underweight in technology, Scott said she is focusing on more defensive, larger mid-cap, and dividend-paying companies. She notes that corporations have also been cautious since regulatory changes are taking time, and managers don’t know what it will cost to comply, and are “taking it very slowly.” Waddell & Reed Advisors New Concepts has risen 2.4% so far this year.
At a Crossroads
Despite uncertainty, the important question is what will happen after events resolve themselves, said Standard & Poor’s Stovall.
“The market is at a crossroads,” Stovall said. Once past the political conventions, the Olympics, and the presidential election, he believes investors will see that the gross domestic product is a little better than people thought, and oil prices may moderate. He expects the economy to grow 4.4% in 2004, and 3.6% in 2005.
Based on this outlook, Standard & Poor’s investment policy committee predicts the S&P 500 will rise 1.6% in 2004, and 5.5% in the first half of 2005.
|Fund Investment Style||Average Returns 2004 Through 8/31/04 (%)|
|Domestic Equity Funds*||-1.72%|
|S&P 500-Stock Index||+0.25%|
|Fund Investment Style||Average Returns August 2004 (%)|
|Domestic Equity Funds*||-0.65%|
|S&P 500-Stock Index||+0.23%|
|Domestic Equity Funds* — 2004 Returns Through 8/31/04|
|Best Performers||Returns (%)||Worst Performers||Returns (%)|
|Large-Cap Growth||Janus Twenty Fund (JAVLX)||+5.1%||Reynolds Fund (REYFX)||-29.8%|
|Large-Cap Value||Philadelphia Fund (PHILX)||+10.8%||Integrity Value Fund (IVUAX)||-5.9%|
|Large-Cap Blend||Alpine Dynamic Dividend Fund (ADVDX)||+7.4%||Marketocracy Masters (MOFQX)||-16.2%|
|Mid-Cap Growth||Diamond Hill Focus/A (DIAMX)||+7.7%||Grand Prix Fund/A (GPFFX)||-34.4%|
|Mid-Cap Value||Third Avenue Value Fund (TAVFX)||+10.6%||Neuberger Berman Focus/Advisor (NBFAX)||-11.2%|
|Mid-Cap Blend||Diamond Hill Small Cap/A (DHSCX)||+8.3%||Van Wagoner Growth Opportunities Fund (VWGOX)||-24.5%|
|Small-Cap Growth||Credit Suisse Instl Small Cap Growth (WISCX)||+14.3%||Thurlow Growth Fund (THRGX)||-31.4%|
|Small-Cap Value||Pacific Advisors: Small Cap Fund/A (PASMX)||+10.8%||GAMerica Capital Fund/A (GCFAX)||-15.0%|
|Small-Cap Blend||Strong Small Company Value Fund (SCOVX)||+8.6%||MassMutual Instl Small Company Growth/N (MMCNX)||-16.4%|
|Domestic Equity Funds* — August 2004 Returns|
|Best Performers||Returns (%)||Worst Performers||Returns (%)|
|Large-Cap Growth||Kelmoore Strategy Liberty Fund/A (KSLAX)||+3.9%||Reynolds Fund (REYFX)||-8.5%|
|Large-Cap Value||Rochdale Dividend and Income Portfolio (RIMHX)||+4.4%||Oakmark Select Fund/I (OAKLX)||-2.1%|
|Large-Cap Blend||Jundt Twenty-Five Fund/A (JTFHX)||+2.9%||ING Alger Capital Apprec Port/Adv (IAPPX)||-4.8%|
|Mid-Cap Growth||Strong Large Cap Core Fund (SLCRX)||+1.4%||American Heritage Growth Fund (AHEGX)||-14.3%|
|Mid-Cap Value||Fairholme Fund (FAIRX)||+3.7%||Oakmark Small Cap Fund/I (OAKSX)||-3.5%|
|Mid-Cap Blend||Ameristock Focused Value Fund (AMFVX)||+2.2%||Van Wagoner Growth Opportunities Fund (VWGOX)||-8.3%|
|Small-Cap Growth||Wells Fargo Small Cap Opportunities/I (NVSOX)||+1.4%||Apex Mid Cap Growth Fund (BMCGX)||-11.3%|
|Small-Cap Value||Corbin Small Cap Value Fund (CORBX)||+7.0%||Heartland Value Fund (HRTVX)||-5.9%|
|Small-Cap Blend||Schroder Capital US Opportunities Fund/Inv (SCUIX)||+1.6%||ING Small Cap Value/A (IVSAX)||-6.3%|
*Excluding sector and balanced funds.
Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 8/31/04.
Contact Bob Keane with questions or comments at [email protected].