Mutual fund investors were probably asking themselves just that at the end of the third quarter as tragic hurricanes pounded the Gulf coast, and interest rates and oil prices rose.

Still, U.S. equity funds held up and posted respectable gains in the third quarter. The average domestic stock fund rose 4.6% for the three months ended September 30, versus a gain of 3.5% for the Standard & Poor’s 500-stock index. Year-to-date, the average domestic stock fund is up 4.3%, versus 2.7% for the S&P 500.

All fund categories finished the quarter in positive territory. Mid-cap growth funds came in first, gaining 6.1% on average. Large-cap value portfolios showed the smallest increases, rising 3.6%. Indeed, growth-oriented funds outperformed their value counterparts for the period. The average growth fund advanced 5.6%, versus a 4.5% gain for the average value fund. However, value funds still reign supreme so far this year, gaining 5.4%, versus a gain of 4.5% for the average growth fund. In fact, all fund style categories are in the black year-to-date, with mid-cap blend funds in first place, up 6.8%.

Energy did its part to power stock funds during the quarter. The top overall performing portfolio, Scudder Commodity Securities Fund/Instl (SKIRX), gained 18.5% for the three months. The $62-million large-cap blend fund holds 81 securities and has 56% of its assets invested in energy stocks, and 42% in materials. The fund, which was just launched in February, has 53% of its assets in the U.S., and 18% in the U.K.

In the top-performing mid-cap growth category, Hennessy Focus 30 (HFTFX), was the best individual performer, rising 16.1% during the quarter, and 32.4% year-to-date. As of August 31, the $102.6-million fund had 37.5% of its assets in energy stocks, and 30.2% in consumer discretionary issues. The absolute best performer year-to-date was CGM Focus Fund (CGMFX), returning a whopping 34.3% for the period, and 17.4% in the third quarter. The $1.5-billion small-cap value fund, run by Kenneth Heebner, has 63% of its assets in energy, and 34% in materials.

S&P 500 earnings, which are expected to rise 15.1% in the third quarter according to Standard & Poor’s Equity Research Services, also helped account for domestic stock funds’ performance. Looking forward, the group expects double-digit earnings gains to continue for the S&P 500 for fourth quarter of 2005, and through the first quarter of 2006.

Sector gains are expected to be dominated by the energy sector, which registered an increase of 42.2% year-to-date. Still, uncertainties remain — in particular for oil prices. Both the Standard & Poor’s Investment Policy Committee and Global Insights, Inc. forecast WTI prices to close 2005 at $65, and edge lower to $54 by year-end 2006. Standard & Poor’s believes oil prices will also be the fulcrum from which the Fed adjusts its aggressiveness in fighting inflation, and that the Fed will continue to raise short-term interest rates through January 2006, ending the rate-tightening cycle at 4.50%.

In summary, the market’s negative reaction to the hurricanes’ effect on consumer sentiment and corporate earnings — similar to consumers’ and investors’ reactions following the terrorist attacks on September 11 — will prove to be overstated, in Standard & Poor’s opinion, and the U.S. equity markets will work their way higher in the fourth quarter, also spurred by investors’ eventual positive response to the anticipated end of the Fed’s rate-tightening policy in early January 2006. Standard & Poor’s end-of-year target for the S&P 500 remains at 1270.

Below is a list of the best- and worst-performing domestic stock funds according to style category at the end of the third quarter 2005 and year-to-date.

Fund Investment Style

Average Returns Third-Quarter 2005 (%)

Average Returns 2005 Through 9/30/2005 (%)

Large-Cap Growth

+4.50

+2.89

Large-Cap Value

+3.58

+3.92

Large-Cap Blend

+3.85

+3.10

Mid-Cap Growth

+6.12

+6.30

Mid-Cap Value

+4.67

+6.75

Mid-Cap Blend

+4.96

+6.80

Small-Cap Growth

+5.77

+4.21

Small-Cap Value

+5.01

+5.71

Small-Cap Blend

+4.81

+4.83

All-Cap Growth

+6.00

+4.64

All-Cap Value

+4.73

+5.10

Domestic Equity Funds*

+4.63

+4.32

S&P 500-Stock Index

+3.49

+2.65

Domestic Equity Funds* — Third-Quarter 2005 Returns

Best Individual Performer

Returns (%)

Worst Individual Performer

Returns (%)

Large-Cap Growth ProFunds:UltraOTC/Inv (UOPIX) +13.49 ProFunds:UltraShort OTC/Svc (USPSX) -12.32
Large-Cap Value Janus Contrarian Fund (JSVAX) +13.28 Phoenix Focused Value/C (JVVCX) -3.67
Large-Cap Blend Scudder Commodity Securities Fund/Instl (SKIRX) +18.50 Rydex Dynamic Funds:Inverse Dynamic Dow 30/C (RYCZX) -5.72
Mid-Cap Growth Hennessy Focus 30 (HFTFX) +16.13 Ameritor Investment Fund (AIVTX) -8.33
Mid-Cap Value CGM Capital Development Fund (LOMCX) +14.81 Phoenix Mid Cap Value Fund/C (FMICX) -0.82
Mid-Cap Blend Fidelity New Millennium (FMILX) +11.95 ProFunds:UltraShort Mid Cap/Svc (UIPSX) -8.42
Small-Cap Growth Bridgeway Fund:Micro-Cap Limited Fund (BRMCX) +13.53 Frontier MicroCap Fund (FEFPX) -13.04
Small-Cap Value CGM Focus Fund (CGMFX) +17.44 Turnaround Fund (TURNX) -2.72
Small-Cap Blend Satuit Capital Management Micro Cap Fund (SATMX) +13.68 Potomac Small Cap/Short/Investor (POSSX) -9.02
All-Cap Growth Delaware Group:Select Growth Fund/I (VAGGX) +13.48 American Heritage Growth Fund (AHEGX) -16.67
All-Cap Value Leuthold Select Industries Fund (LSLTX) +12.61 Weitz Hickory Fund (WEHIX) -3.61

Domestic Equity Funds* — Year-to-Date Returns Through 9/30/05

Best Individual Performer

Returns (%)

Worst Individual Performer

Returns (%)

Large-Cap Growth Fidelity Advisor Dynamic Cap Apprec/Instl (FDCIX) +14.94 Reynolds Funds Opportunity Fund (ROPPX) -8.34
Large-Cap Value Neuberger Berman Partners/Investor (NPRTX) +16.10 Crawford Dividend Growth/C (CDGCX) -7.60
Large-Cap Blend Jennison 20/20 Focus Fund/Z (PTWZX) +17.72 Wells Fargo Advtg Large Company Core/C (WLCCX) -18.56
Mid-Cap Growth Hennessy Focus 30 (HFTFX) +32.38 Ameritor Investment Fund (AIVTX) -50.00
Mid-Cap Value CGM Capital Development Fund (LOMCX) +25.35 Allianz Funds:OCC Renaissance/C (PQNCX) -7.95
Mid-Cap Blend Fidelity Focused Stock (FTQGX) +16.53 ProFunds:UltraShort Mid Cap/Svc (UIPSX) -15.38
Small-Cap Growth Bridgeway Fund:Micro-Cap Limited Fund (BRMCX) +22.71 Frontier MicroCap Fund (FEFPX) -25.93
Small-Cap Value CGM Focus Fund (CGMFX) +34.28 Seligman Small-Cap Value/D (SSVDX) -7.58
Small-Cap Blend Huntington Fds:Situs Small Cap Fund/Trust (HSUTX) +17.71 Calvert New Vision Small Cap Fund/B (CNVBX) -9.89
All-Cap Growth Permanent Port Family of Fds Aggressive Grth (PAGRX) +20.44 American Heritage Growth Fund (AHEGX) -28.57
All-Cap Value Diamond Hill Focus/A (DIAMX) +17.63 Runkel Value Fund (RVFDX) -5.51

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