A Few Ports in the Stock Storm


By Angelina Dance Domestic equity funds performed well during the second quarter despite a tough climate of persistently high crude oil prices and rising short-term interest rates. The average portfolio gained 2.4%, vs. a 1.2% return for the S&P 500-stock index. However, that gain was not enough to offset the dismal first quarter. Year to date through June 30, the average domestic stock fund edged down 0.3%, while the S&P 500 slipped by 1%.

A number of factors contributed to the flattish midyear results. Crude oil prices continued to rise, recently spiking to a new record of more than $60 per barrel. And, as expected, the Federal Reserve just boosted its target for the federal funds rate by 25 basis points, to 3.25%, and signaled the possibility of further rate hikes.

GROWTH IS GROWING. "The muted first-half performance for stocks was the result of a projected slowdown in corporate earnings growth, the impact of record energy prices on consumer spending, and the sustainability of the Fed's rate-tightening program," says Standard & Poor's Investment Policy Committee (IPC).

Among style categories, growth-oriented funds outperformed their value counterparts during the second quarter -- the average growth fund advanced 2.9%, vs. a 2.3% gain for the average value fund. However, value reigned supreme for the first half of the year, gaining 0.9%, vs. a 1% loss for the average growth fund.

Mid-cap value funds represented the best-performing specific fund category for the first half, rising 2.4% on average. Indeed, mid-caps in general bested their small- and large-cap counterparts over the first half, gaining 1.5% year to date. Meanwhile, small- and large-cap funds lost about 0.3% and 0.7%, respectively.

CORPORATE CASH. The top performer among mid-cap value funds, the Artisan Mid Cap Value Fund (ARTQX), rose 10.9% year to date. As of May 31, the $1.6 billion portfolio had 30.4% of its assets invested in financial services, 27.5% in consumer discretionary, and 21.8% in energy stocks.

The overall best-performing fund for the midyear period, the Rydex Dynamic Funds:Venture 100 Fund/H (RYVNX), is an index-tracking fund. With a 17.2% gain year to date, this fund is leveraged 200% to the inverse of the NASDAQ 100 Index. (Note: An earlier version of this story incorrectly stated, "...this fund seeks results that correlate to the inverse of the NASDAQ 100 Index.")

With the U.S. stock markets seemingly meandering, much of the focus will likely be on corporate earnings. Standard & Poor's expects that companies in the S&P 500 will show 7.8% earnings growth for the second quarter, ending a 12-quarter, double-digit winning streak. However, for the second half of the year, Standard & Poor's expects earnings to pick up and for the index to resume delivering double-digit gains, posting a 12% rise in the third quarter and an 11% climb in the fourth.

THINK GLOBAL. "The past 12 quarters of earnings growth have permitted companies to get their balance sheets in order and create the largest cash reserve in the history of the S&P 500 index," says Howard Silverblatt, equity market analyst at Standard & Poor's. "While earnings growth is slowing relative to the prior three years, the forward growth remains steady and is expected to produce record earnings for 2005."

Jeff Knight, chief investment officer of global asset allocation for Putnam Investments, says the sideways action in stocks through the first half of the year "is part and parcel of the low-return environment that investors now face." Knight comments that buy-and-hold strategies are not suitable for such sideways markets and investors probably need a new recipe, incorporating a more global perspective.

Standard & Poor's believes that U.S. stocks will stay in a trading range until investors get a clearer picture of the Federal Reserve's interest-rate intentions. The Investment Policy Committee forecasts that the S&P 500 will close out the year at 1,255 -- representing about a 3.6% gain for the year -- and suggests investors focus on large, high-quality companies, with consistent earnings growth.

WINNERS AND LOSERS. "We believe the combination of still-healthy economy growth, an attractive market valuation, and the eventual end to the Fed's rate-tightening efforts will lead to an end-of-year rally in stocks," says the IPC.

Here are the best- and worst-performing domestic stock funds according to style category for the second quarter and first half of 2005. (For complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)

Equity Funds

Fund Investment Style

Average Returns 2nd-Quarter 2005 (%)

Average Returns First Half 2005 (%)

Large Cap Growth

2.4

-1.5

Large Cap Value

1.3

0.3

Large Cap Blend

1.3

-0.8

Mid Cap Growth

3.1

0.2

Mid Cap Value

2.8

2.4

Mid Cap Blend

2.9

1.9

Small Cap Growth

3.7

-1.4

Small Cap Value

3.2

0.5

Small Cap Blend

3.2

-0.1

All Cap Growth

2.5

-1.2

All Cap Value

1.8

0.4

Domestic Equity Funds (excludes sector and balanced funds)

2.4

-0.3

S&P 500-Stock Index

1.2

-1

Looking at other types of funds, international equity funds fared better than domestic ones for the first half. However, returns of foreign stock funds eroded for U.S. investors as the dollar gained against foreign currencies in the last six months. Even though most global equity markets made modest gains in local currencies year to date, many have declined in dollar terms. For example, markets in the euro zone gained about 7% in local currency but saw around a 5% drop in dollar terms.

DOLLAR REVVING. The average international stock fund gained just 0.57% for the first half, while the average global equity portfolio, which can also invest in U.S. stocks, edged down 0.19%. In the second quarter, international stock funds rose 0.25%, while global stock funds picked up 1.4%.

Indeed, after a three-year decline, the U.S. dollar, which seemed to have bottomed out at the end of 2004, became resurgent again. Through the first half of 2005, the dollar gained roughly 5% against the yen, and 10% vs. the euro. The dollar's reversal has thrown a new wrinkle into foreign-stock picking as investors are already grappling with high oil prices, rising U.S. interest rates, and a possible slowdown in the global economy.

High-quality bond funds delivered modestly positive results through the first half of 2005, performing nicely in the second quarter. Bond funds held up as the U.S. economy appeared to be on solid footing, with inflation in check, consumer confidence picking up, and short-term interest rates still at relatively low levels.

JUNK-BOND OUTLOOK. The average high-quality corporate bond rose 1.5% in the first half, while the average government securities fund edged down 0.07%. In the second quarter, the average high-quality corporate bond fund rose 2.4%, and the average government bond fund gained 2.7%.

The high-yield bond market bounced up and down during the second quarter before ending modestly higher. The average mutual fund that invests in high-yield, or junk, bonds returned 1.5% during the second quarter. Through June, the average high-yield bond fund rose 0.8%.

Standard & Poor's found that volatility in the U.S. speculative-grade market intensified in April and May but appeared to retreat in June. Observers said that starting at the end of the first quarter, investors were worried that the market would be hurt by higher interest rates as the Federal Reserve tightened monetary policy.

EXCELLENT EQUITIES. There were also concerns about the market's ability to digest large batches of bonds from giant auto makers General Motors (GM) and Ford Motor (F) that were downgraded to junk status in May.

Below is a list of the top-ranked (by BusinessWeek) equity funds and their five-year annualized performance.

A-List Equity Funds

Fund

Symbol

5-Year Annualized Pre-Tax Return (%)

ABN AMRO Real Estate N

ARFCX

19.3

AIM Gold & Precious Metals Inv

FGLDX

18.2

AIM Real Estate A

IARAX

21.5

AXP Precious Metals A

INPMX

17.8

Adelante US Real Estate Securities Y

LLUYX

20.0

Aegis Value

AVALX

18.5

Allegiant Small Cap Value I

AMRIX

16.1

AllianceBernstein Real Est Invstmnt Adv

ARSYX

19.5

AllianceBernstein Real Est Invstmnt Instl I

ARIIX

19.0

Allianz NFJ Small Cap Value A

PCVAX

19.5

Alpine International Real Estate Equity Y

EGLRX

19.7

Alpine Realty Income & Growth Y

AIGYX

21.6

Alpine US Real Estate Equity Y

EUEYX

34.1

Amer Beacon Small Cap Value PlanAhead

AVPAX

22.6

Amer Century Global Gold Inv

BGEIX

21.3

Amer Century Real Estate Inv

REACX

20.7

Amer Century Sm Cap Vl Inv

ASVIX

19.8

Amer Century Sm Company Inv

ASQIX

14.8

Ariel

ARGFX

15.1

Artisan Small Cap Value

ARTVX

17.6

Berwyn

BERWX

20.9

BlackRock Global Resources Inv A

SSGRX

29.3

Boston Company Small Cap Value

STSVX

17.7

Brazos Real Estate Securities Y

BJRSX

18.6

Bridgeway Micro Cap Limited

BRMCX

17.3

Bridgeway Ultra Small Company

BRUSX

25.7

Bridgeway Ultra Small Company Market

BRSIX

20.9

Bruce

BRUFX

33.4

Buffalo Small Cap

BUFSX

15.4

Burnham Financial Serv A

BURKX

26.8

CGM Focus

CGMFX

30.2

CGM Realty

CGMRX

27.8

CRM Small Cap Value Instl

CRISX

16.1

Century Small Cap Select Instl

CSMCX

19.2

Cohen & Steers Realty Focus Instl

CSSPX

24.6

Cohen & Steers Realty Income C

CSCIX

18.6

Cohen & Steers Realty Shares

CSRSX

20.8

Cohen & Steers Reatly Shares Instl

CSRIX

21.0

Columbia Acorn USA Z

AUSAX

14.6

Columbia Real Estate Equity Z

CREEX

17.5

Columbia Small Cap Z

SMCEX

14.4

Commonwealth New Zealand

CNZLX

14.4

Consulting Grp Cap Mkts SmCp Vl Eq

TSVUX

15.8

Davis Real Estate A

RPFRX

18.8

Delafield

DEFIX

18.7

Delaware American Services A

DASAX

16.3

Delaware Real Estate Inv Tr A

DPREX

18.6

Delaware Small Cap Value A

DEVLX

16.7

Diamond Hill Bank & Financial A

BANCX

24.1

Dreyfus Premier Sm Cap Val A

DSVAX

16.6

EII Realty Securities Instl

EIIRX

17.9

Eastern European Equity A

VEEEX

18.1

Evergreen Precious Metals A

EKWAX

26.8

Evergreen Special Values A

ESPAX

15.6

Excelsior Real Estate

UMREX

19.4

FBR Large Cap Financial

FBRFX

15.0

FBR Small Cap

FBRVX

18.3

FBR Small Cap Financial

FBRSX

24.9

FMC Strategic Value

17.3

Fairholme

FAIRX

18.7

Fenimore Equity Income

FAMEX

14.9

Fidelity Low Priced Stock

FLPSX

18.7

Fidelity Real Estate Investment

FRESX

20.2

Fidelity Select Chemicals

FSCHX

14.3

Fidelity Select Construction & Housing

FSHOX

22.5

Fidelity Select Gold

FSAGX

17.3

Fidelity Select Home Finance

FSVLX

16.6

Fidelity Select Industrial Materials

FSDPX

15.1

Fidelity Select Medical Delivery

FSHCX

23.2

Fidelity Value

FDVLX

14.7

Fifth Third Micro Cap Value Instl

MXAIX

17.5

First American Real Estate Securities Y

FARCX

21.2

First Eagle Global A

SGENX

16.8

First Eagle Gold A

SGGDX

27.2

First Eagle Overseas A

SGOVX

16.6

Forward Emerald Select Banking & Finance A

HSSAX

22.5

Forward Uniplan Real Estate Investment

FFREX

17.7

Franklin Balance Sheet Invmt A

FRBSX

16.5

Franklin Gold & Precious Metals A

FKRCX

17.9

Franklin MicroCap Value

FRMCX

20.2

Franklin Real Estate Sec A

FREEX

19.0

Gabelli Gold AAA

GOLDX

24.3

Goldman Sachs Mid Cap Value A

GCMAX

17.9

Goldman Sachs Real Estate Sec A

GREAX

19.7

Goldman Sachs Small Cap Value A

GSSMX

16.9

Harris Insight Small Cap Value N

HSVAX

16.7

Heartland Select Value

HRSVX

15.7

Heartland Value

HRTVX

17.0

Heartland Value Plus

HRVIX

14.9

Heitman REIT PBHG

PBRTX

19.7

Hilliard Lyons Senbanc

SENBX

19.9

HomeStead Small Company Stock

HSCSX

14.7

Hotchkis & Wiley Mid-Cap Value I

HWMIX

21.7

Hotchkis & Wiley Small Cap Value I

HWSIX

29.4

ICON Energy

ICENX

20.3

ICON Financial

ICFSX

14.3

ING Precious Metals

LEXMX

19.4

ING Russia A

LETRX

30.8

Ivy Global Natural Res A

IGNAX

19.7

Ivy Real Estate Securities A

IRSAX

20.5

J Hancock Classic Value A

PZFVX

17.3

J Hancock Real Estate A

JREAX

18.1

JPMorgan Small Cap Value Sel

PSOPX

18.6

JPMorgan US Real Estate A

SUSIX

19.3

James Advantage Small Cap

JASCX

15.5

Janus Mid Cap Value Inv

JMCVX

16.4

Janus Small Cap Value Inv

JSCVX

14.6

Jennison Natural Resources A

PGNAX

20.3

JohnsonFamily Small Cap Value

JFSCX

14.8

Keeley Small Cap Value

KSCVX

17.1

Kensington Strategic Realty A

KSRAX

20.5

Kinetics Paradigm

WWNPX

16.9

Kinetics Small Cap Opportunity

KSCOX

14.7

Legg Mason Eq Tr US Small Cap Vl Prim

LMSVX

18.1

Longleaf Partners Small Cap

LLSCX

14.3

MainStay Small Cap Opportunity I

MOPIX

16.6

Managers Real Estate Securities

MRESX

17.8

Marshall Mid Cap Value Inv

MRVEX

16.6

Matthews Asian Growth & Income

MACSX

16.8

Matthews Korea

MAKOX

16.0

Merrill Lynch Natural Resources A

MDGRX

17.8

Midas

MIDSX

15.6

Morgan Stanley Instl European Real Estate A

MSUAX

22.4

Morgan Stanley Instl US Real Estate A

MSUSX

20.4

Morgan Stanley Real Estate B

REFBX

19.0

Morgan Stanley Special Value D

SVFDX

14.4

Munder Real Estate Eq Invmnt A

MURAX

18.8

Munder Small Cap Value A

MNVAX

19.3

Mutual Financial Services A

TFSIX

17.4

Neuberger Berman Genesis Inv

NBGNX

16.1

OCM Gold

OCMGX

21.5

Oakmark Global I

OAKGX

17.9

Oakmark International Small Cap I

OAKEX

15.5

Oppenheimer Gold & Special Minerals A

OPGSX

20.9

Pacific Advisors Small Cap A

PASMX

17.8

Pacific Capital Small Cap Y

PSCYX

21.3

Perritt Micro Cap Opportunities

PRCGX

17.3

Phoenix Mid Cap Value Fund A

FMIVX

17.8

Phoenix-Duff & Phelps Real Estate Sec A

PHRAX

21.4

Phoenix-Seneca Equity Income A

REALX

17.5

Pioneer Real Estate Shares A

PWREX

19.3

ProFunds Real Estate Ultrasector Inv

REPIX

21.8

Putnam Small Cap Value A

PSLAX

16.5

RS Global Natural Resources

RSNRX

22.6

RS Partners

RSPFX

26.4

RS Value

RSVAX

16.7

Robeco Boston Partners Sm Cap Val II Inv

BPSCX

22.3

Royce Pennsylvania Mutual Inv

PENNX

15.6

Royce Special Equity

RYSEX

18.7

Royce Total Return Inv

RYTRX

15.2

Russell Real Estate Securities S

RRESX

20.2

STI Classic Small Cap Value Equity L

STCEX

17.8

Scudder Gold & Precious Metals S

SCGDX

26.1

Scudder Small Company Value S

SCSUX

17.0

Security Mid Cap Value A

SEVAX

16.6

Skyline Special Equities

SKSEX

15.4

Spirit of America Real Estate A

SOAAX

20.4

Strategic Partners Real Estate Securities A

PURAX

23.0

Stratton Monthly Dividend REIT

STMDX

18.9

Stratton Small Cap Value

STSCX

19.5

T Rowe Price Mid-Cap Value

TRMCX

16.4

T Rowe Price New Era

PRNEX

14.3

T Rowe Price Real Estate

TRREX

20.7

T Rowe Price Small Cap Value

PRSVX

17.7

TAMARACK Enterprise S

TETSX

15.9

TAMARACK Microcap Value S

TMVSX

14.7

Texas Capital Value & Growth

TCVGX

20.4

Third Avenue Real Estate Value

TAREX

21.7

Third Avenue Small Cap Value

TASCX

14.6

Third Millennium Russia

TMRFX

27.1

Tocqueville Gold

TGLDX

25.6

UBS PACE Sm/Med Co Val Eq P

PCSVX

14.7

UMB Scout Small Cap

UMBHX

15.6

US Global Accolade Eastern European

EUROX

28.5

US Global Inv Global Resources

PSPFX

29.1

US Global Inv Gold Shares

USERX

21.5

US Global Inv World Prec Minerals

UNWPX

23.4

USAA Precious Metals & Minerals

USAGX

26.1

Undiscovered Managers REIT Instl

URTLX

20.7

Van Eck Global Hard Assets A

GHAAX

15.7

Van Eck Intl Investors Gold A

INIVX

21.1

Van Kampen Real Estate Securities A

ACREX

19.5

Vanguard Energy Inv

VGENX

19.9

Vanguard Precious Metals

VGPMX

26.8

Vanguard REIT Index

VGSIX

19.6

Vanguard Selected Value

VASVX

16.3

Vanguard Small Cap Value Inv

VISVX

14.3

Wasatch Core Growth

WGROX

16.7

Wasatch Micro Cap

WMICX

20.0

Wasatch Small Cap Value

WMCVX

17.8

Wells Fargo Advtg Small Cap Value Z

SSMVX

16.6

Wells S&P REIT Index A

WSPAX

19.3

Westwood Realty AAA

WESRX

18.2

Wilshire Target Small Co Vl Inv

DTSVX

16.8

Yacktman

YACKX

17.8

Yacktman Focused

YAFFX

18.0

iShares DJ US Real Estate Index

IYR

18.7

iShares MSCI Austria Index

EWO

26.0

n/i numeric investors Small Cap Value

NISVX

25.8

Dance is a fund analyst for Standard & Poor's Fund Advisor


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