Markets & Finance

A Hot Summer? Not for Equity Funds


By James A. Anderson Someone must have kept the air conditioning running a bit too high in lower Manhattan last month. Despite high temperatures, investors were cool toward stocks, leaving those in equity funds feeling rather frosty indeed. At the same time, fixed-income funds managed some fun in the sun, delivering a solid month with total returns of about 1.5% on average.

For stocks, any hopes for a summer-long rally got clobbered early in July, as a gang of companies quickly made it plain that their second-quarter showings wouldn't live up to expectations. That kept the large-cap benchmark, the Standard & Poor's 500, mired in uncertainty, resulting in a 1% drop for the index in July. Tech shares, meanwhile, were shipwrecked. Despite upbeat earnings news from Microsoft mid-month, it seemed every other whiz-bang equipment maker could not make the earnings grade, and as a result the chip, Internet, and tech-heavy Nasdaq composite was punished with a 6.2% drop.

Value investors and growth groupies alike suffered. In large-cap stocks, the S&P Barra Growth index slipped 0.3%, while the Barra Value index fell 1.7%. The S&P Barra Midcap growth index dropped 3%, while its Midcap Value rose a modest 0.02%. S&P Barra Smallcap Growth slid 2.57%, while its Smallcap Value finished down 1.1%.

SHREDDED BY UNCERTAINTY. It's no wonder then, that BusinessWeek's equity-fund categories all slid in July. By our calculations, equity funds on average surrendered 2.7% of their value in July, with the -2.5% posted by U.S. Diversified Funds edging out the -3.5% posted by International portfolios in our universe.

July's economic uncertainties shredded a number of BusinessWeek's fund categories. Our Technology and Japan groupings suffered the most damage, with both listings falling an average of 8.9% during the month. Not only did a gaggle of tech companies throw up a white flag on earnings for the current quarter but Japan's economy remained mired in its doldrums as well.

With the picture being clouded by Argentina's fiscal woes and speculation that the South American nation might default on some of its debt, Latin American funds and Diversified Emerging Market portfolios were punished with average drops of 6.7% during July. An Asian recession caught up with funds investing around the Pacific Rim, pushing the group down an average of 6.3%. Finally, tech uncertainties tripped up BusinessWeek's Small-Cap Growth classification, which ended the month down 5.8%. Things were so bleak, in fact, that BusinessWeek's best-performing stock fund grouping -- Mid-Cap Value -- found it hard to muster a breakeven month, finishing July down 0.1%.

LOCK-STEP MOVES. July, however, was a time for bond funds, particularly portfolios anchored in long-term Treasuries, to come out and shine. BusinessWeek's Long-Government category, composed of funds investing in U.S. Treasuries and agency paper, led all groups in the month, with a 2.7% average total return. Long-term general funds and Intermediate general funds, both of which spread their assets across government and corporate debt, logged over 2.0% in total returns for July as well. Only two bond-fund groups finished the month in the red.

Convertible funds, which fall when stocks tumble, dropped in lock-step with the equity markets, ending the month off 2.3% on average. Concerns that the U.S. economy's problems might be crippling for global cash registers coupled with Argentina's woes sent Emerging Market Bond funds reeling 4% in July.

With tech shares singed as badly as the blacktop on a summer's day, it comes as no surprise that funds shorting the sector would finish the month atop our stock-fund listings. The No. 1 spot this past month went to Potomac Internet Short (PDISX) with a 17.9% total return. As its name implies, the Potomac fund's business is to bet on a battering for Web shares, and July proved no disappointment. Year-to-date, however, Potomac's bets have been a volatile proposition, and July's results left the fund with nothing more than a 17.4% total return up until the beginning of August.

HOT HOMEBUILDER. On BusinessWeek's Equity A-list, July's top performer was the Muhlenkamp fund (MUHLX), with a 3.4% total return. A value-minded offering, the Wexford (Pa.) fund is invested primarily in the market's mid-cap range. Holdings such as homebuilder Beazer Homes USA (BZH), a stock that's up 62.7% so far, have been a boon. The Muhlenkamp fund ended July up 14.2% so far in 2001.

First place among fixed income funds went to the Florida Street Fund (FLSBX) this past month. A portfolio of corporate junk bonds run out of Baton Rouge, La., Florida Street finished July with a 6.9% total return. The fund ended July up 7.1% for 2001. Among A-list funds, the top fixed income performer in July was Dreyfus' Investment Grade Bond Funds Intermediate-Term (DRITX), a versatile offering that carries a 65% position in high-quality government paper but can shift the rest of its portfolio in higher-risk and -return holdings such as junk bonds, delivered a 2.0% total return over the last month. At the end of July the fund was up 6.9% for 2001.

When July came to a close, 14 funds moved onto BusinessWeek's Equity A List, replacing another 14 that were downgraded. The newcomers included a number of small- and mid-cap funds as well as a number of value portfolios. Also, it was time to wave goodbye to a few financial funds. Our fixed-income A List saw hardly any turnover, with just one fund trading places with one that dropped off.

Equity Fund A-List Upgrades

Alliance Balanced Shares A

Dreyfus Index Fds Midcap Index

Fidelity Select Air Transport

GMO Pelican

GMO US Core III

Hartford Capital Appreciation A

Investment Company of America A

Janus Core Equity

Keeley Small Cap Value

LKCM Equity

Merrill Lynch Master Small Cap Value B

Mutual European Z

One Group Mid Cap Value I

Smith Barney Security & Growth A

Strong American Utilities

Wells Fargo Growth Balanced I

Equity Fund A-List Downgrades

AIM Global Financial Svs A

Alleghany Chicago Balanced N

Alleghany Chicago Growth & Income N

Bear Stearns S&P Stars A

Davis Financial A

Fidelity Select Electronics

INVESCO Financial Services Inv

J Hancock Large Cap Value A

J Hancock Small Cap Value A

Janus Equity-Income

MFS Value A

Prudential Utility A

Sequoia

Whitehall Growth Svc

Fixed Income Fund A-List Upgrades

Hawaii Intermediate

Fixed Income Fund A-List Downgrades

Franklin CA Int Term Tax Free A Anderson teaches journalism at the City University of New York. Follow his twice-monthly Mutual Fund Maven column, only on BW Online


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