Markets & Finance

A Short but Rough Month


In February, it was hard to find positive returns, except among funds that bet stocks would fall

The market was stuck on a seesaw in February. Stocks would fall on Enron-induced accounting fears, then rise the next day as a good bit of economic news was reported, only to plunge again because of telecom woes. It went on that way all month, resulting in weak, but not disastrous performance for most mutual funds. Stock funds fell an average of 2.2% in February, faring a bit worse than the S&P 500, which dropped 1.9%.

The top-performing equity funds of the month were ones that sell stocks short, betting that they'll fall. Rydex Dynamic Venture 100 (RYVNX), which is designed to deliver returns twice the inverse of the Nasdaq, and ProFunds UltraShort OTC (USPIX) topped the monthly list, both with a 27% gain in February. A number of gold funds, including Tocqueville Gold (TGLDX) and First Eagle SoGen Gold (SGGDX), delivered 15% in the month.

Precious metals, with a 10.7% gain, was the month's top-performing fund category. Many funds that invest in emerging markets and real estate held their own, and those categories registered positive average returns. But the only diversified U.S. equity-fund category that posted returns in the black in February was mid-cap value, with 0.5% return. That's the good news.

PUMMELED SECTORS. The bad news affected a lot more shareholders than the good news. Some of the top-performing sectors of the bull market continued to get pummeled. Technology-sector funds were down an average of 14%, and communications funds fell an average of 11%. Firsthand Communications (TCFQX) lost 26% of its value in February, making it the worst-performing equity fund of the month. Next came Black Oak Emerging Technology (BOGSX), which dropped 25% in February. Clearly an investment strategy of seeking growth was out of favor. Small-cap, mid-cap, and large-cap growth funds were down an average of 6%, 5%, and 4%, respectively, for the month.

Despite February's gloom, some fund managers always find strategies that allow them to prosper in tough markets. A look at trailing 12-month performance through February shows a couple of standouts. CGM Focus (CGMFX), run by star portfolio manager Ken Heebner, is up a stunning 75% in the past year. That fund not only makes big sector bets but can also short stocks as well. Schroder Capital Ultra Investors (SMCFX) is another hedge-fund-like choice that has done spectacularly: It's up 73% in the past year.

On the fixed-income side, emerging-market bond funds were the highfliers, with a 4% gain in February. Almost all bond-fund categories eked out a small gain of just a percentage point, but high-yield bond funds lost 1.3% in February. Ariston Convertible Securities (CNCVX), which dropped 9.6% in February, was the worst-performing bond fund in February. The best performer was GMO Emerging Country Debt III (GMCDX), returning 5.6% for the month.

New stock funds on the A-list:

Berger Small Cap Value Inv

Fidelity New Millennium

Gabelli Eqty Fds Small Cap Growth AAA

Hotchkis & Wiley Mid-Cap Value 1

ICON Healthcare

ICON Information Technology

MS Fincl Svcs Tr B

MS Instl Small Co Gr B

Merrill Lynch Focus Value B

Mosaic Equity Tr Mid Cap

One Group Small Cap Value I

PIMCO RCM Global Health Care

State Street Research Mid Cap Value A

Tocqueville Small Cap Value

Value Line Special Situations

Stock funds downgraded from the A-list:

AIM Global Health Care A

American Balanced A

Dresdner RCM Global Health Care

Dreyfus Gr & Val Fds Midcap Value

First Growth & Income I

Matrix Advisors Value

Mercury HW Mid-Cap Value I

Merrill Lynch Asset Bldr Mid Cap Value B

MFS New Discovery A

Muhlenkamp

Munder Micro Cap Equity A

North Track PSE Tech 100 Idx A

Stratton Growth

Wells Fargo Moderate Balanced I

Wells Fargo Small Cap Opportunities I

By Amey Stone in New York


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