Summer's Sunny Stocks


By Angelina Dance The trend remained positive for domestic equity funds in July, with a 4.6% advance for the month, vs. a 3.6% gain for the Standard & Poor's 500 Index.

Both the S&P 500 and the Nasdaq reached four-year highs, while the Dow Jones Industrials index moved to its highest level since March. On July 28, the S&P 500 rose to 1243.72, the highest close for the index since June 12, 2001, while the Nasdaq closed at 2198.44, the best close since June 8, 2001.

TWICE THE FUN. Among style categories, growth-oriented funds outperformed their value counterparts in July. They advanced 5.2%, vs. a gain of 4.4% for value funds. Small-cap growth funds stood out among fund categories, surging 6% on average, while large-cap value funds ended the month in last place among the fund categories, advancing on average 3.3%.

At the top of this month's review were a number of index-tracking funds that seek to provide investment results corresponding to twice (200%) the daily performance of benchmarks such as the Nasdaq-100 index. These funds use leverage to magnify gains and losses, resulting in greater volatility and risks, especially when the indexes they track are concentrated in specific sectors such as technology. ProFunds: UltraOTC/Inv (UOPIX) gained 15% in July, as did Rydex Dynamic Funds: Velocity 100 Fund/H (RYVYX).

Following the two top-performing funds were a number of small-cap growth ones, including Bridgeway Fund: Micro-Cap Limited Fund (BRMCX), which is closed to new investors. It returned 11.3% for the month. The $73-million fund invests primarily in industrials (19.7%), communications (18.6%), consumer, noncyclicals (18.6%), and consumer cyclicals (15.4%). Nearly 41% of assets are allocated among the top 10 holdings, of which Itron (ITRI), the largest, comprises 5.1%. (For complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)

MORE GAINS TO COME. Market sectors that helped boost monthly performance for funds were information technology, energy, consumer discretionary, and materials, which all posted strong gains. Positive earnings surprises helped propel stocks across the board, marking the thirteenth straight quarter of double-digit (year-over-year) operating gains for the S&P 500.

"Buoyed by 71% of the 500 issues beating their estimates, the expected 8% earnings gain for the S&P 500 quickly grew to 10.7%, and should reach 12% by the end of the period," says Howard Silverblatt, market equity analyst at Standard & Poor's. He adds that double-digit gains are expected in the third and fourth quarters of 2005, permitting "companies to feel more comfortable about dedicating resources to operations." Standard & Poor's Investment Policy Committee currently forecasts that the S&P 500 index will close the year at 1,270.

During the month, Federal Reserve Chairman Alan Greenspan said he looked forward to sustained economic growth ahead, and stated that the Fed must "continue to remove monetary accommodation," indicating that measured rate hikes will continue. Greenspan said inflation pressures are expected to remain "contained," but he cited higher oil prices, geopolitical tensions, low long-term rates, and the housing "froth" as risks for the outlook.

EQUITY-FUND WATCH. Also during the month, Beijing announced it would no longer peg the yuan to the U.S. dollar, an arrangement that had been in place since 1994. China now ties the yuan to a basket of currencies instead. The revaluation is likely to trim the U.S. trade gap with China in the longer term, as the increased cost of imported goods eventually reduces demand. In the short run, however, the U.S. trade gap may actually widen, as the cost of goods will rise more rapidly than the attempt to secure less-expensive substitutes.

Below is a list of the best- and worst-performing domestic equity funds by style category for July 2005.

Equity Funds Rally In July

Fund Style

Average Returns for July (%)

Average Returns YTD (%)

Large-Cap Growth

+4.49

+2.85

Large-Cap Value

+3.26

+3.56

Large-Cap Blend

+3.68

+2.89

Mid-Cap Growth

+5.50

+5.77

Mid-Cap Value

+4.68

+7.13

Mid-Cap Blend

+4.82

+6.89

Small-Cap Growth

+6.01

+4.50

Small-Cap Value

+5.74

+6.30

Small-Cap Blend

+5.45

+5.37

All-Cap Growth

+4.97

+3.75

All-Cap Value

+3.87

+4.24

Domestic Equity Funds (excludes sector and balanced funds)

+4.55

+4.24

S&P 500-Stock Index

+3.60

+2.88

S&P SmallCap 600 Index

+5.95

+7.33

Dance is an analyst for S&P Fund Advisor


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