Markets & Finance

Value, Small-Caps Start the New Year Off Right


With a little push from the Federal Reserve, the stock market spent much of January trying to make people forget a dismal 2000 -- with a good deal of success. Technology stocks had a rousing rally and shareholders of equity funds were rewarded with healthy returns. Alan Greenspan's pop decision to ease rates early on helped fixed-income funds as well, as bond prices climbed and junk-bond and emerging-market funds turned in double-digit total returns.

Throughout January, investors seemed determined to will tech stocks back into vogue, no matter how much bad news came out of the sector. Federal Reserve Chairman Alan Greenspan got the party started early, surprising onlookers by hacking a half-point off rates during the first week of the month. After that, even as Microsoft blushed over its lackluster profits and Intel practically apologized for the coming first quarter, the Nasdaq cruised to a 12.2%. And despite worries that the Fed's aggressive action and subsequent rate reduction in early February might be a sign that the economy was closer to snoozing than previously expected, stocks did rather well. The Standard & Poor's 500 posted a 3.6% total return in January, and the Russell 2000 hit 5.2% during the same period.

Despite big gains by the tech-heavy Nasdaq, value and small-cap investors were the stock market's biggest winners in January. The S&P Barra Large-Cap Value index rose 4.2%, beating the 2.9% posted by its Growth counterpart. S&P Barra's Mid-Cap Value index finished with a 4.5% return compared to Mid-Cap Growth's 0.0%. Small-Cap Value's outstanding 7.9% walloped Small-Cap Growth's meager 0.1% return for the month. An active Fed kept the bond market buoyed, with the benchmark Lehman Aggregate Bond index rising 1.6% in January.

COMEBACK KIDS. During January, domestic stock funds did well, but their cousins that invest in emerging markets and Latin America did even better. Big gains by equity markets in Mexico, Argentina, and Brazil helped mutual funds investing in Latin America to average a 12.7% return for the month, compared to 2.9% for the average U.S. diversified equity fund, according to BusinessWeek's calculations. BusinessWeek's categories for diversified emerging-market funds and funds invested in Pacific Asia excluding Japan did well, too, posting 11.7% and 11.0% returns, respectively, thanks to 10%-plus gains in a number of Latin markets as well as in the Taiwan, Thailand, and South Korea exchanges.

Communication and tech funds made notable comebacks. Rallies by wireless and long-distance companies helped communication funds to a 11.3% average total return in January, while the Nasdaq's advance pushed technology funds to a 9.8% showing for the month. Surprisingly, some of 2000's strongest stock-fund sectors took a hit in January. Health funds fell an average of 7.6% during the month, as pharmaceutical companies backed off their gains from a year before. Concerns that oil prices were topping out dragged natural resources down an average 3.1%, while utility funds dropped 2.5%.

Junk bonds ruled BusinessWeek's calculations for fixed-income funds. Despite worries that a weakening economy would lift bankruptcies and drown the sector in red ink, bond-market investors felt that junk issues had been unjustly hammered at the end of 2000. That prompted a rally that brought high-yield funds an average 6.4% total return during the month. Hopes that developing nations would turn the corner in 2001 helped emerging-market bond funds hit a 5.7% total return in January. And with the U.S. equity market on the rebound, convertible funds finished with a 3.7% total return.

AT THE APEX. A wild and wooly duo led BusinessWeek's one-month total return rankings of equity funds. The top spot went to the the Apex Mid-Cap Growth Fund (BMCGX), a portfolio of small-cap companies with about 80% of its assets parked in tech and financial shares. Formerly known as Bhirud Mid-Cap Growth, after its portfolio manager Suresh L. Bhirud, Apex garnered an amazing 59.3% total return for the month, thanks in part to a 22.4% stake in Bear Stearns (BSC), and a 6.1% holding in Advanced Micro Devices (AMD). The brokerage and chipmaker raced off to gains of 22% and 78.1% in January, respectively. The ever-volatile Apex fund dropped 76.0% in 2000.

Second place in the equity standings went to the quixotic American Heritage Fund (AHERX), which rose 46.7% in January. Portfolio manager Heiko Thieme was lucky to have 80% of the fund's assets parked in Senetek (SNTKY), a British biotech research firm. January's top A-rated fund, Needham Growth (NEEGX) posted a 22.2% total return. A portfolio of small-cap stocks with a 63.2% weighting in tech companies, the Needham Fund reported a 7.4% total return in 2000. It has an average annual total return of 36.5% over the last three years.

JUNK REBOUNDS. Our list of fixed-income funds found Monterey Murphy New World Tech Convertible (MNWCX) at the top for the month with a 14.8% return. The fund focuses on convertible bonds issued by tech companies, allowing it to benefit from the sector's rebound during the month. Pilgrim High Yield II (NHYFX) finished second with a 11.9% return in January, owing to a reinvigorated junk-bond market.

First place among BusinessWeek's A-rated bond funds went to the HighMark California Intermediate Tax-Free Bond (HMITX), a portfolio of muni holdings in the Golden State that returned investors 2.0% in January.

January saw 20 newcomers added to the BusinessWeek A List of top-ranked equity funds, including Ariel, Royce, and Needham funds that focus on small- and mid-cap companies. The equity list saw 19 funds dropped from its ranks, including a number of utility and growth portfolios. The fixed-income A List gained six new funds and said goodbye to six.

Changes to the A-List By James A. Anderson


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