Funds That Rev Up Your Portfolio

Funds That Rev Up Your Portfolio

Just when mutual fund investors thought that things couldn’t get any worse–they did! In 2001, recession and terror attacks rocked the stock market, sending U.S. stock funds to double-digit losses. Large-company growth funds, the ones that led the way in the 1990s bull market, suffered the heaviest losses.

Last year should have been better. The economy recovered, albeit slowly, and Americans were mercifully spared from another catastrophic terrorist atrocity. Yet the stock market–and stock funds–turned in an even worse performance. During 2002, U.S. diversified stock funds lost nearly 23%, according to Morningstar Inc. There was literally no place to hide.

Small got smaller. Even small-cap value funds, which buy small-company stocks that sell at low prices compared to the company’s earnings and had excelled in 2000 and 2001, lost money.

Offshore, off-balance. Foreign stock funds also fell, although their losses were smaller than those of the domestic funds.

Nothing special. Specialty funds holding utility, healthcare, technology, and telecom funds dropped 24% to 43%. Tech funds now have posted three straight years of losses of more than 37%. In fact, if you had $100,000 invested in the average tech fund three years ago, your stake would be worth less than $25,000 today.

Only a few fund categories offered any relief:

Gold continued to gleam. The price of gold rose to nearly $350 per ounce in 2002, up about 20% compared to 2001. That was an indication of the second straight stellar year for precious metals funds, gaining 38%.

Real money. Real estate funds posted a small gain, reflecting continued strength in property values. During the three-year bear market, from 2000 to 2002, real estate funds have produced annualized gains of more than 12%, by far the best of any fund category tracked by Morningstar.

Bonds boomed. For the third straight year, bond funds blossomed while stock funds sagged. Except for junk bonds (which fell as defaults rose), all types of bond funds enjoyed solid gains. Long-term government bond funds returned 9%, bringing the three-year annualized return to more than 11%.

Why did stock funds perform so horribly in 2002? Actually, the stock market was holding its own in the first half of the year, with the Dow Jones industrial average near 10,500. Then stocks endured a five-month free fall that saw the Dow dip below 7,500 before rallying a bit in the fourth quarter.

Was this midyear plunge caused by all those reports of corporate book-cooking? “Make no mistake about it, the market abhors uncertainty and the seemingly weekly terrorist alerts and corporate scandals have destabilized investor confi

dence,” maintains Anthony Ogorek, a financial planner in Williamsville, New York. “However, stock prices fell primarily due to poor earnings, not these more publicized factors.”

Improved earnings, then, could break a three-year losing streak, the first such activity since 1939—1941 at the end of the Great Depression. On the eve of America’s entry into World War II, U.S. stocks had a three-year annualized loss of 7.4%.

By comparison, the annualized loss in the 21st century so far