Data through December 18 revealed the winners and losers in 2002. Fixed-income funds again outperformed most equity funds and attracted the majority of investor money. Evidence of this was the PIMCO Total Return supplanting the Vanguard 500 as the world’s largest mutual fund.
The specialty-precious metals group was the top-performing fund category for the second year in a row, gaining 55%.
For the third year in a row, investors found good value in value-oriented domestic equity, as value funds performed significantly better than growth-oriented funds. The average large-value fund lost about 18% for the year, compared with an average loss of roughly 27% for large-growth funds.
Overall, the average domestic stock fund lost more than 20% this year.
Not surprisingly, given the prolonged bear market seen over recent years, bear funds, those betting on market declines, showed an advance in 2002, with the pessimistic Prudent Bear tops among US stock funds, posting a 62% gain.
Overall though, it was specialty-real estate funds topping all other domestic stock categories, advancing a little more than 2% for the year. Despite some pockets of weakness in office real estate investment trusts (REITs), consistent consumer spending supported shopping center REITs and funds that own them. Funds such as Alpine Realty Income & Growth, up more than 13% for the year, performed the best in this category.
Additionally, European real-estate funds did well on the coattails of a strengthening Euro. Leaders in this category were the Morgan Stanley Institutional European Real Estate, Security Capital European Real Estate, and Kensington Select Income. Through December 18, all three funds are up at least 14% for the year.
Fixed-income and balanced funds also showed gains. The average bond fund gained more than 6%, with only one bond category posting a loss for the year: high-yield bonds.
However, in the fixed-income world it was international bond funds showing the largest gains, as the average international bond fund returned more than 12%.
Falling bond yields in Europe helped boost this group’s returns. Funds that buy high quality, non dollar-denominated bonds and did not hedge back into US dollars, such as American Century International Bond, did well as the dollar weakened.
“The seemingly interminable bear market has dealt investors some hard lessons during the past three years. Many have learned the value of diversification and have shifted money from stock funds to bond funds this year,” said Russ Kinnel, director of mutual fund analysis for Morningstar.
Some Not So Good
There were few havens abroad, as the average international stock fund dropped more than 14%.
Hardest hit in this category were Latin American funds, affected by political and currency concerns. Fidelity Advisor Latin America, Morgan Stanley Latin American, and Van Kampen Latin American, were among the category’s worst funds, with each losing at least 22% for the year.
Once sold as a refuge for savings because of the dividends paid by the highly regulated power, phone, and natural gas services in which they invest, the specialty-utilities category failed to live up to its reputation as a haven.
Utilities funds, decimated in 2001 with an average loss of 21%, have lost nearly 24% on average through December 18, as overcapacity in the utilities and telecommunication markets, a weak economy, and high-profile blowups continued to hang over the group.
Even with a fourth quarter rally, Technology stocks and the funds that own them are still on pace to finish their third consecutive year in the red. Technology and communication funds represented the worst performers of all the fund categories, with average losses of approximately 40% each
Hardest hit of the technology funds were the Black Oak Emerging Technology, ProFunds Ultra Semiconductor and Van Wagoner Technology, all seeing their value plummet more than 65% for the year.