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By Amey Stone The mutual-fund industry, embroiled in its first major scandal in a generation, has one major advantage as it battles to retain the shareholders' trust -- strong recent returns. (For full results of more than 9,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)
Heady recent gains for most stock funds will no doubt take some of the sting out of the already bruising rounds of allegations, admissions, and investigations kicked off on Sept. 3 by New York Attorney General Eliot Spitzer (see BW Online, 9/4/03, "Scandal Finds the Funds' Sly Secrets?"). In his bombshell of a complaint, Spitzer outlined "special trading opportunities" that one hedge fund was able to secure from four major fund families. He cites this as evidence of widespread abuse of investor trust in the mutual-fund industry.
"INTOLERABLE AND INEXCUSABLE." Since then, other securities regulators have promised to investigate the alleged trading abuses in the industry, and at least two firms mentioned, Janus (JNS
) and Bank of America, have promised to make restitution to any shareholders who lost money in the discretionary trading deals that Spitzer brought to light (see BW Online, 9/09/03, "Can Janus Save Face?").
Fund-industry trade group Investment Company Institute wrote to the Securities & Exchange Commission on Sept. 5, promising to cooperate with its investigation. "If true, the business practices alleged in the complaint grossly abused investor trust," ICI President Matthew Fink informed SEC Chairman William Donaldson. "We will do all that we can to make it clear that such behavior is intolerable and inexcusable."
Before the scandal broke, fund returns continued their ascent on the back of a charging bull market. In August, fund investors cheered at improving economic and corporate news, and they relaxed as interest rates, which surged in July, leveled off. U.S. diversified equity funds gained 3.2% on average in August, easily besting the 1.9% total return of the Standard & Poor's 500-stock index, according to data from Standard & Poor's. Year-to-date, diversified equity funds are up a stunning 20.6%, head and shoulders above the S&P 500's 15.9% runup.
SMALL CAPS, BIG GAINS. Bond funds, which stumbled badly in July, found their feet in August. The average bond fund gained 0.7% -- a welcome uptick after losing 2.8% the month before. Long-bond funds, which lost 6.5% in July, gained 1.6% in August. FBR Total Return Bond (RSGVX
) was the top-performing bond fund in August, with a 6.3% one-month gain.
Small-cap growth funds were the stars of the diversified equity-fund universe, up 5.3% on average in August -- and now, up 31.2% for the year. In contrast, large-cap value funds gained just 2% in August and are up 14.9% year-to-date.
Looking for an inflation hedge as the economic recovery gained speed, investors drove up the prices of precious-metals and natural-resources funds in August. Precious metals was the best-performing fund category, with a 13.8% gain. The leading fund in that category was Scudder Gold and Precious Metals (SCGDX
), which jumped 19.8% in August. Natural-resources funds rose 6.9%.
BRUISED BEARS. Technology funds were up 7.6%, as new demand for semiconductors powered returns for the group. The top-performing fund for the month was ProFunds Semiconductor Ultrasector (SMPIX
), with a 23.6% one-month surge. Berkshire Focus (BFOCX
), which owns a lot of tech stocks, was also a top performer, gaining 14.8% in the month. Japan funds, too, scored heady gains, rising 10.2% in the month, benefiting from tech stock holdings. The Japan Fund (SJPNX
), for example, rose 15.1%.
The worst-performing funds in August were those that bet stocks would fall. ProFunds Ultrashort OTC (USPIX
) fell 10.1% in the month. Health-care funds also suffered, as big-name pharmaceutical companies saw steep profit-taking in August. The health-fund group fell 2% on average -- the worst-performing category in August and the only one in the red.
Such strong results give the newly battered mutual-fund industry plenty to boast of in the short term. That will help while Spitzer continues to shine a bright light on what may turn out to be the seamier side of the business.
August's A-rated Funds
1st Source Monogram Special Equity
ABN AMRO Mid Cap N
ABN AMRO Veredus Aggressive Growth N
AIM Opportunities I A
AXP Precious Metals A
Alliance Greater China 97 B
Amer Century Glbl Gold Inv
Amer Century Sm Cap Vl Inv
Armada Small Cap Value I
Artisan Mid Cap
BNY Hamilton Sm Cap Gr Inv.
Baron Small Cap
Bjurman Barry Micro Cap Growth
BlackRock International Opportunities Inv. A
BlackRock US Opportunities Inv. B
Boston Partners Small Cap Value II Invest
Brazos Micro Cap Y
Bridgeway Aggressive Investors 1
Bridgeway Micro Cap Limited
Bridgeway Ultra Small Company
Bridgeway Ultra Small Company Market
Buffalo Small Cap
CRM Small Cap Value Instl
Calamos Growth A
Conseco Equity Y
Dreyfus Gr & Val Fds Midcap Value
Dreyfus Premier Emerging Markets A
Driehaus Asia Pacific Growth
Driehaus Emerging Markets Growth
Eaton Vance Wldwd Hlth Sciences A
Emerald Select Banking & Finance A
Evergreen Precious Metals Holdings A
Excelsior Mid Cap Value
FBR Small Cap Financial A
FBR Small Cap Value A
FMC Strategic Value
FMI Common Stock
Fidelity Japan Small Co.
Fidelity Low Priced Stock
Fidelity New Millennium
Fidelity Select Energy Service
Fidelity Select Gold
Fidelity Select Medical Systems & Equipment
Fidelity Small Cap Stock
Fidelity Southeast Asia
Fifth Third Micro Cap Value Instl.
First American Sm Cap Select Y
First American Small Cap Growth Opport Y
First Eagle Gold
Franklin Biotechnology Discovery A
Franklin Gold & Precious Metals A
Fremont US Micro Cap
Fremont US Micro Cap Instl.
GMO Emerging Countries III
Hartford Mid Cap A
Hennessy Cornerstone Growth
Heritage Mid Cap Stock A
Hotchkis & Wiley Mid-Cap Value I
Hotchkis & Wiley Small Cap Value I
ICM/Isabelle Small Cap Value Inv.
ICON Information Technology
IMS Capital Value
ING Precious Metals
ING Russia A
INVESCO Energy Inv.
INVESCO Gold & Precious Metals Inv.
INVESCO Leisure Inv.
Ivy Global Natural Res A
JPMorgan Mid Cap Value I
Janus Mid Cap Value Inv.
Janus Small Cap Value Inv.
Jennison Natural Resources A
Legg Mason Eq Tr Special Invmnt Prim
Legg Mason Glbl Tr Emerging Mkts Prim
Liberty Acorn Z
Liberty Newport Greater China A
Liberty Newport Tiger A
Lord Abbett Small Cap Value A
MTB Small Cap Growth A
Managers Emerging Mkts Eqty
Matthews Asian Growth & Income
Matthews Pacific Tiger
Merrill Lynch Global Small Cap B
Merrill Lynch Master Small Cap Value B
Merrill Lynch Natural Resources A
Morgan Stanley Instl Small Cap Growth Inst.
Morgan Stanley Instl Small Company Gr B
Munder Healthcare B
Munder Micro Cap Equity A
NI Numeric Investors Emerging Growth
Navellier Perf Mid Cap Growth
Neuberger Berman Genesis Inv.
North Track PSE Tech 100 Idx A
Nuveen NWQ Multi Cap Value R
Oakmark International Small Cap I
Oakmark Select I
Oberweis Emerging Growth
Oberweis Micro Cap
Olstein Financial Alert C
Oppenheimer Developing Markets A
Oppenheimer Gold & Special Minerals A
PBHG Mid Cap
PIMCO PEA Renaissance A
PIMCO RCM Biotechnology D
PIMCO RCM Global Healthcare D
Perritt Micro Cap Opportunities
Pioneer Small Cap Value A
Quaker Aggressive Growth A
RS Contrarian Value
RS Diversified Growth
RS Global Natural Resources
RS Smaller Co Growth
Reserve Private Eqty Small Cap Growth R
Rockland Small Cap Growth
Royce Low Priced Stock
Royce Micro-Cap Inv.
Royce Opportunity Inv.
Royce Trust & Giftshares Inv.
Rydex BioTechnology Inv.
Rydex Precious Metals
Salomon Brothers Small Cap Growth A
Santa Barbara Bender Growth Y
Saratoga Small Capitalization I
Scudder Gold & Precious Metals S
Scudder Micro Cap Invest
Security Mid Cap Growth A
Security Mid Cap Value A
Sentinel Small Company A
Smith Barney Aggressive Growth A
State Street Research Aurora A
State Street Research Global Resources A
Strong Advisor Small Cap Value Z
TCW Galileo Asia Pacific Equity I
TCW Galileo Opportunity N
TCW Galileo Value Opportunities I
Tocqueville Small Cap Value
Touchstone Emerging Growth A
Turner Micro Cap Growth
Turner Small Cap Value
UBS US Small Cap Growth Y
US Global Accolade Regent Eastern Euro
US Global Inv Gold Shares
USAA Precious Metals & Minerals
Value Line Emerging Opportunities
Van Eck Intl Investors Gold A
Vanguard Capital Opportunity
Vanguard Health Care
Vanguard Precious Metals
WM West Coast Equity A
Wasatch Core Growth
Wasatch Micro Cap
Wasatch Small Cap Growth
Wasatch Small Cap Value
Wasatch Ultra Growth
Westport Select Cap I Stone is a senior writer at BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column