In July, It Was Safety First


By Amey Stone As evidence started to mount in July that the economic recovery was cooling down, investors decided to take some risk off the table. For mutual-fund holders, that meant returns for the riskiest funds fell deeply into the red, while the safest funds managed to eke out some small gains.

The average diversified equity fund fell 4.8% in July. That was a far sight worse than the S&P 500 Index, which was down 3.3%, according to data from Standard & Poor's. The average bond fund climbed 0.9%, about on par with the 1% gain in the Lehman Bros. Aggregate Bond Index. (For complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)

TECH WRECK. The heightened aversion to risk meant that large-cap funds outperformed small-cap ones in July. It also meant funds that employ a value-oriented strategy, seeking out cheap stocks, did better than funds that search out earnings. Ironically, growth funds fell in July even as stellar second-quarter earnings were being reported. Stocks in the S&P 500 climbed a robust 25% in the second quarter over last year, according to data from earnings tracker Thomson First Call. Small-cap growth funds, for example, lost a punishing 8.5% on average in July. Large-cap value funds, however, fell just 2.6%.

Tech funds staggered in July as earnings for some companies in that sector disappointed. Software makers were particularly weak. Cautious comments from chief executives following strong results made investors worry that earnings growth was peaking. Tech, which was down 11.6%, was the worst-performing of all the sectors. The worst-performing stock fund in July was ProFunds Internet Ultrasector (INPIX), which plummeted 23.2%. Reynolds (REYFX), a large-cap fund packed with tech names, was the second-worst performer, down 21.8%. Royce Technology Value (RYTVX) was the third-worst, down 20.6% as its value-orientation failed to shield it from losses in the sector.

HEDGING PAYS OFF. The normally defensive health sector fell a punishing 7.1% in July. Its downturn is likely due to investors' belief that the sector would be hurt if Democratic candidate John Kerry wins the Presidency. Scudder Global Biotechnology (DBBTX), the worst performer among them, fell 13.6% in July.

The top-performing funds in July were those designed to make money when stocks go down. GE Contra, a fund that hedges using options and is meant to protect shareholders from broader losses when the stock market falls (and isn't open to the general public), gained a remarkable 21.4% to earn the top spot. Rydex Dynamic Venture 100 (RYVNX) came in second, with a 16.2% gain, and ProFunds UltraShort OTC (USPIX) came in third, with a 16.1% return.

Latin American funds, which have been star performers for the past 18 months, enjoyed the best returns of any sector, gaining 2.5% on average. The standout: iShares MSCI Brazil Index (EWZ), which gained 7.5%. Natural resources, the second-best-performing sector, gained 2.1% on average, thanks to higher energy prices. ProFunds Energy Ultrasector (ENPIX) and Fidelity Select Energy Service (FSESX) were the best among them, up 4.8% and 3.8% respectively. Utilities and real-estate funds, the only other stock sectors in the black in July, eked out gains of 0.8% and 0.5% respectively.

WHITTLING BACK. On the fixed-income side, emerging-markets bond funds were the top gainers, with a 2.8% return, thanks again to the improving economies in Latin America. Otherwise, longer-term bond funds did better than their short-term brethren. General long-term bond funds gained 1.4%, while short-term bond funds gained 0.4%.

Of the bond-funds categories, only convertibles lost money, falling an average of 2.6%. Just as in the broader mutual-fund world, investors who fared best in July were those who whittled back on risk.

The A-List Funds

Fund

5-Year Pretax Return

ABN AMRO Mid Cap N

13.4

ABN AMRO Real Estate N

14.7

AIM Real Estate A

17.5

AXP Precious Metals A

15.7

Aegis Value

17.2

Al Frank

18.5

AllianceBernstein Real Est Invstmnt Adv

14.9

AllianceBernstein Real Est Invstmnt Instl I

13.9

Alpine Realty Income & Growth Y

18.1

Alpine US Real Estate Equity Y

20.1

Amer AAdvantage Small Cap Value Instl

15.5

Amer Century Glbl Gold Inv

17.9

Amer Century Real Estate Inv

16.2

Amer Century Sm Cap Vl Inv

16.2

Amer Century Sm Company Inv

14.3

Armada Small Cap Value I

15.0

Artisan Small Cap Value

14.8

Berwyn

12.6

Bjurman Barry Micro Cap Growth

23.3

BlackRock International Opportunities Inv A

15.4

Boston Partners Small Cap Value II Invest

21.8

Brazos Real Estate Securities Y

14.1

Bridgeway Aggressive Investors 1

15.3

Bridgeway Micro Cap Limited

17.1

Bridgeway Ultra Small Company

29.5

Bridgeway Ultra Small Company Market

24.7

Bruce

27.6

Buffalo Small Cap

19.9

Burnham Financial Serv A

25.3

CGM Focus

27.6

CGM Realty

20.3

CRM Small Cap Value Instl

14.6

Calamos Growth A

16.7

Cohen & Steers Equity Income C

14.6

Cohen & Steers Realty Shares

15.5

Cohen & Steers Special Equity

18.4

Columbia Real Estate Equity Z

14.0

Columbia Small Cap Z

13.0

Constellation Clover Small Cap Value I

14.6

Davis Real Estate A

14.0

Delafield

15.1

Delaware RE Inv Tr A

15.1

Diamond Hill Bank & Financial A

15.6

Driehaus International Discovery

16.1

EII Realty Securities Instl

13.4

Eaton Vance Asian Small Companies A

17.0

Eaton Vance Wldwd Hlth Sciences A

14.5

Emerald Select Banking & Finance A

15.5

Evergreen Precious Metals A

23.9

Excelsior Real Estate

14.2

F Russell Real Estate Securities S

15.8

FBR Small Cap A

15.5

FBR Small Cap Financial A

20.3

FMC Strategic Value

14.4

FMI Sasco Contrarian Value

12.9

Fidelity Canada

14.4

Fidelity Low Priced Stock

15.3

Fidelity Real Estate Investment

16.1

Fidelity Select Gold

15.3

Fidelity Select Medical Delivery

12.7

Fidelity Select Medical Systems & Equipment

15.4

Fifth Third Micro Cap Value Instl

16.5

First American Real Estate Securities Y

16.3

First American Sm Cap Select Y

12.5

First American Small Cap Growth Opport Y

17.5

First Eagle Global A

14.7

First Eagle Gold A

25.4

First Eagle Overseas A

15.7

Forward Uniplan Real Estate Investment

13.7

Franklin Gold & Precious Metals A

15.3

Franklin Microcap Value

16.3

Franklin Real Estate Sec A

14.4

GMO REIT III

13.7

Gabelli Gold AAA

23.5

Gabelli Westwood Realty AAA

14.8

Goldman Sachs Real Estate Sec A

15.6

Goldman Sachs Small Cap Value A

14.1

Harris Insight Small Cap Value N

13.7

Heartland Value

16.2

Hennessy Cornerstone Growth

15.3

Hotchkis & Wiley Mid-Cap Value I

19.4

Hotchkis & Wiley Small Cap Value I

19.7

iShares MSCI Austria Index

14.7

ICON Energy

21.4

IMS Capital Value

12.7

ING Precious Metals

16.4

ING Russia A

33.4

INVESCO Energy Inv

13.6

INVESCO Gold & Precious Metals Inv

15.3

Ivy European Opportunities A

17.1

Ivy Global Natural Res A

16.7

Ivy Real Estate Securities A

15.3

JPMorgan Mid Cap Value I

15.5

Janus Mid Cap Value Inv

16.1

Janus Small Cap Value Inv

12.7

Jennison Health Sciences B

15.5

Jennison Natural Resources A

18.1

Lord Abbett Small Cap Value A

14.0

MFS International New Discovery A

14.1

Matthews Asian Growth & Income

16.0

Meridian Growth

13.9

Meridian Value

15.8

Merrill Lynch Global Small Cap C

13.2

Merrill Lynch Master Small Cap Value B

12.8

Morgan Stanley Instl US Real Estate A

14.7

Morgan Stanley Real Estate B

13.6

Munder Healthcare B

14.0

Munder Micro Cap Equity A

14.0

Munder Real Estate Eq Invmnt B

13.0

Munder Small Cap Value Y

14.8

Mutual European Z

12.5

NI Numeric Investors Small Cap Value

19.6

Neuberger Berman Genesis Inv

14.8

OCM Gold

20.3

Oberweis Micro Cap

14.6

One Group Small Cap Value I

14.5

Oppenheimer Developing Markets A

14.4

Oppenheimer Gold & Special Minerals A

16.0

Oppenheimer Real Asset A

16.8

PBHG REIT Advisor

14.6

PIMCO PEA Renaissance A

13.9

PIMCO RCM Biotechnology D

16.9

PIMCO RCM Global Healthcare D

13.8

Pacific Capital Small Cap Y

17.3

Perkins Discovery

16.4

Perritt Micro Cap Opportunities

19.4

Phoenix-Duff & Phelps Real Estate Sec A

18.2

Pioneer Real Estate Shares A

14.4

Principal Real Estate Securities A

16.1

RS Contrarian Value

13.3

RS Global Natural Resources

15.8

RS Partners

21.1

Royce Low Priced Stock

16.7

Royce Micro-Cap Inv

16.3

Royce Opportunity Inv

17.9

Royce Pennsylvania Mutual Inv

13.3

Royce Premier

13.2

Royce Select

15.2

Royce Special Equity

15.5

Royce TrustShares Inv

13.8

SAFECO Small Cap Value Inv

13.4

STI Classic Small Cap Value Equity L

12.7

Schroder Capital US Opportunities Inv

12.6

Scudder Gold & Precious Metals S

24.4

Security Capital US Real Estate

15.4

Security Mid Cap Value A

14.9

Sentinel Small Company A

13.9

Smith Barney Security & Growth A

12.7

Smith Barney Small Cap Value A

13.9

Spirit of America Real Estate A

14.3

State Street Research Aurora A

16.7

State Street Research Global Resources A

26.6

Strategic Partners Real Estate Securities B

15.8

Stratton Monthly Dividend REIT

14.6

Stratton Small Cap Value

12.7

Strong Advisor Small Cap Value Z

18.4

Strong Mid Cap Disciplined

14.7

T Rowe Price Mid-Cap Value

13.1

T Rowe Price Real Estate

16.2

T Rowe Price Small Cap Value

15.4

TAMARACK Enterprise S

13.9

TAMARACK Microcap Value S

13.3

TCW Galileo Opportunity N

13.4

TCW Galileo Value Opportunities I

15.6

Third Avenue Real Estate Value

18.1

Third Avenue Small Cap Value

13.8

Third Millennium Russia

25.3

Tocqueville Gold

24.0

Tocqueville Small Cap Value

13.8

Turner Micro Cap Growth

25.4

US Global Accolade Eastern European

19.8

US Global Inv Global Resources

16.8

US Global Inv Gold Shares

15.6

US Global Inv World Prec Minerals

15.4

USAA Precious Metals & Minerals

23.7

Undiscovered Managers Behavioral Vl Instl

14.5

Undiscovered Managers REIT Instl

17.0

Value Line Emerging Opportunities

12.6

Van Eck Intl Investors Gold A

15.1

Van Kampen Real Estate Securities A

13.6

Vanguard Energy

14.7

Vanguard Precious Metals

18.7

Vanguard REIT Index

14.7

Wasatch Core Growth

15.9

Wasatch Micro Cap

25.3

Wasatch Small Cap Growth

13.2

Wasatch Small Cap Value

19.7

Wells Fargo Small Cap Opportunities I

12.9

Wells S&P REIT Index A

14.0

Stone is a senior writer at BusinessWeek Online and covers the markets as a Street Wise columnist


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