Stellar Returns
Funds turn in their best year in four
How marvelous a year was it for stock funds? Plain and simple, investors saw the best returns of the millennium. Of course, that would be all the more impressive if it wasn't just a few years into the new millennium. Then again, after suffering horrendous years in 2000, 2001, and 2002, most investors surely will take what they can get. And in 2003, they got a lot. The average domestic stock fund gained 31.4 percent, according to fund tracker Morningstar, as the stock market finally shifted into high gear. "Thanks to a powerful rally that kicked off in mid-March, it was one of the best-performing markets in recent memory," gushes Morningstar analyst Amy Arnott.
That rebound came after three years of losses, a stretch that saw the market suffer its first such losing streak since the Great Depression. "It was an impressive rally across the board, and all fund categories, except for bear funds, finished with double-digit gains," says Janet Brown of the NoLoad Fund X newsletter.
A new record? One reason for that awesome breadth in fund performance, Brown notes, was the remarkable breadth in the market itself. Of the 499 stocks in the S&P 500 that were traded for the whole year in 2003, 92 percent rose. "In the 24 years that Standard & Poor's has been keeping track of that statistic, that is the best performance ever, exceeding the old record of 86 percent set in 1995," Brown adds. By contrast, market breadth was comparatively narrow in the great '90s bull market that ended in 2000. In fact, in 1999--the last year of that bull's life--more stocks in the S&P 500 went down than up, despite the index's rising almost 21 percent.
The hottest fund action, though, wasn't found in funds that buy the big stocks that constitute the S&P 500. Rather it was in funds that own the smaller issues that typically do best at the start of a new economic and market cycle. Morningstar's three best-performing domestic-fund categories were small-cap growth (up 44.8 percent), small-cap blend (up 43 percent), and small-cap value (up 43 percent). Lipper analyst Martin Vostry notes that the last time small-cap funds put in such a powerful performance was 1991--the first year of a new bull market that would last through the '90s.
But while the performance of the domestic stock fund sector was fantastic, it was actually edged out by the much smaller international fund sector thanks in large part to the faltering U.S. dollar. "Currency weakness helped the world equity funds in two ways," Vostry explains. "It beefed up current net asset values which, when priced in U.S. dollars, benefit from the sharp depreciation of the dollar. "It [also] caused some foreign investors to look for investments outside of the U.S., thus benefiting such areas as Europe and Asia." International funds overall gained 39 percent, with emerging market funds leading the way. Latin American funds, for instance, gained 61.1 percent.
Golden days. Gold-oriented funds were another beneficiary of the falling dollar, since the metal is viewed as an alternative store of value when currency markets get volatile. Lipper data show that gold funds gained 58.3 percent, which came on the heels of huge gains in 2002 (up 63 percent) and 2001 (up 18.8 percent) when the falling stock market sent investors fleeing to safer sectors. Among sector funds, technology made a strong comeback, gaining 55.5 percent.
Compared with the numbers for stock funds, bonds didn't stand much of a chance, especially with stronger economic growth beginning to push interest rates higher. The average taxable-bond fund gained 8.5 percent, with the average municipal bond fund rising 4.4 percent. What's more, it's tough to think much about bonds when it seems like there is still a ways to go for stocks. As Brown notes, the average bull market lasts just over four years and we're only entering Year 2 with this one: "The bulls appear to have plenty of momentum left for 2004."
This story appears in the January 19, 2004 print edition of U.S. News & World Report.
advertisement
