Markets & Finance

Heading for the Holidays on a High


For the second month in a row, equity-fund investors rode a Wall Street rally as stocks and portfolios rocketed. Meanwhile, the Fed's 10th rate cut of the year helped take the air out of bond funds, a group that had delivered solid gains for the year before backtracking in November.

Last month's rebound was sparked by two things: Signs that some key industries, including tech, would come charging back early in 2002, and a swift and dramatic turn for the better in the Afghanistan fighting. Fueled by those two factors, the Standard & Poors 500-stock index recorded an outstanding 7.7% upswing. A strong earnings report early in the month by tech bellwether Cisco Systems (CSCO) sent the Nasdaq Composite charging. That index logged a 14.2% total return for the month, capping a two-month period that saw the tech-heavy Nasdaq climb 29%.

Equity-fund investors couldn't have asked for better. BusinessWeek's data show the average stock fund finished November with a 6.8% total return for the month (see Mutual Fund Scoreboard). U.S. funds were up an average of 7.6% as investors held on tightly to rosy projections for 2002. At the same time, our international category fared well, too, ending the month up 5.5% on average.

GROWTH DELIVERED. Technology portfolios led our list of equity-fund categories with a 15.3% rally last month. Our tallies for funds that invest in the Pacific Rim outside of Japan took second place among our groupings with a 12.3% total return in November.

It's worth noting that although value funds for large-, mid-, and small-cap stocks had quite a good month, their numbers are nowhere near those their growth counterparts managed to produce. Large-cap growth funds were up 8.8%, while large-cap value averaged 6.2% during the same time. Mid-cap growth funds advanced 8.5%, while mid-cap value finished up 6.4%. Small-cap growth funds were up 8.1%, and small-cap value rose 6.4% in November.

Only 2 of our 29 equity-fund categories slipped in November. Utility funds were shaken by Enron's unraveling and finished down an average 0.5% for the month. A global slowdown and OPEC's futile efforts to convince Russia to lower crude production hurt natural-resource funds, which dropped an average of 1.7% last month.

Bonds had a tougher go of it. For one, the Treasury Dept.'s shocking move to do away with the 30-year bond at the end of October had repercussions that lasted well into November as yields took a hit. When Alan Greenspan's Federal Reserve Board lowered rates yet again early in November, bonds slid further. The Lehman Brothers Aggregate index shows that they lost 1.4% during the month.

YIELD HUNTING. Bond funds in general did a bit better, dropping an average of 0.5%. For the second straight month, convertible funds soared along with the equity market, gaining an average of 4.4% in November, according to BusinessWeek calculations. Dwindling interest rates in the U.S. and Europe sent investors looking for higher yields in emerging-market bonds. Funds investing in that portion of the bond market were our second-best-performing group on our fixed-income lists, with a 3.3% average total return in November.

Funds focusing on long government paper and intermediate-term bonds suffered in the wake of the 30-year bond's demise. Our long-term government bond category fell 2.8%, and intermediate-term fixed-income funds were off 1.4% on average.

A fund that makes a heavy bet on companies listed in the Nasdaq 100, ProFunds Ultra OTC Fund (UOPIX) came up big and led all equity funds with a 34.9% total return in November. It's too bad the Nasdaq hasn't seen much sunshine in 2001. The over-the-counter market's woes have battered the poor ProFunds portfolio much of the year, with the fund posting a -67.8% total return for 2001 as of Nov. 30.

In November, two funds from our elite A-list of high-return, low-risk funds tied for first place, both reporting a total return of 13.8% for the month. Dreyfus Midcap Value Fund (DMCVX) scored big gains on rallies by drug stocks like ICN Pharmaceuticals (ICN) and tech shares like Conexant Systems (CNXT). As of Nov. 30, it was up an impressive 11%. The John Hancock Small Cap Value Fund (SPVAX) racked up its 13.8% gain last month thanks to a rebound by shares such as Covance (CVD), which helps advise biotech and pharmaceutical companies on product development. This fund was up 0.5% for the year as of Nov. 30.

UPS AND DOWNS. Last month, a convertible bond offering, the Monterey Murphy New World Core Technology Fund (MNWCX), reported the highest monthly return among the fixed-income portfolios BusinessWeek tracks. Because companies allow convertible bonds to be exchanged for their shares, the fixed-income investment tracks the ups and downs of the stock market. That correlation allowed Monterey Murphy, which invests primarily in technology companies' convertible bonds, to ride the sector's rally to a 19.4% total return for the month. The volatile fund hasn't had a smooth trek in 2001, however, and finished November down 19.7% for 2001.

The Goldman Sachs Adjustable Rate Government Bond Fund (GSAMX) took top honors on our Fixed Income A-List. A fund that invests in short-term bonds tied to the market for adjustable-rate mortgages, the Goldman Sachs offering managed a 0.6% total return for November. At the end of last month, it had delivered investors 6.4% year-to-date.

At the end of November, 17 new equity funds were upgraded to our A-list as 16 departed. Many newcomers were growth-oriented portfolios or value portfolios with sizable tech weightings. A number of funds leaving the A-list were more conservative value portfolios that missed out on November's big tech bonanza. Among fixed-income funds, six portfolios rose to join our A-list and seven were downgraded below our top grouping.

Equity A-List Upgrades

Heartland Select Value

Hennessy Cornerstone Growth

J Hancock Small Cap Value A

Kayne Anderson Rudnick Small Cap

MS Hlth Sciences B

MS Special Value B

Matrix Advisors Value

Meridian Growth

Navellier Perf Mid Cap Growth

Oakmark Select I

Quaker Aggressive Growth

Royce Opportunity Inv

Salomon Brothers Capital II

Standard & Poor's MidCap 400 Depositary Rcpt

Tocqueville Small Cap Value

Turner Mid Cap Growth

Waddell & Reed Adv Science & Technology A

Equity A-List Downgrades

Alliance Balanced Shares B

AllianceBernstein Utility Income B

Country Growth

Deutsche Lifecycle Short Range Inv

Flex-fund Total Return Utilities

Fremont US Micro Cap

IDEX Janus Balanced B

Julius Baer International Equity A

Keeley Small Cap Value

Meyers Pride Value

Parnassus

Strong American Utilities

Third Avenue Value

Tweedy Browne Global Value

Vontobel US Value

Waddell & Reed Adv Asset Strategy A

Fixed Income A-List Upgrades

Amer Century Ltd-Tm Bd Inv

Dreyfus BASIC Intm Muni Bd

Dreyfus Inv Grd Bd Fds Interm-Term Inc.

Eaton Vance Prime Rate Reserves

Sit MN Tax Free Income

Vanguard Short Term Bond Idx

Fixed Income A-List Downgrades

Homestead Short Term Govt Sec

Marshall Short Term Income Inv

Vanguard Bond Idx Short Term Bd

Vanguard Muni Bond Short Term

Vanguard Short Term Corp

Vanguard Short Term Federal

WPG Intermediate Muni Bond

By James A. Anderson in New York


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