A so-so year
A fourth-quarter rally leaves investors with average returns
By comparison, the typical large-cap blue chip fund that invests in growth stocks was up less than 8 percent, according to Morningstar.
Many analysts say that 2005 is likely to be the year when blue chip stocks finally return to supremacy. One reason: Both long-term and short-term interest rates are expected to rise in 2005. And rising rates lead to higher borrowing costs, which tends to take some of the wind out of the sails of smaller firms that rely on cheap financing to speed along.
Of course, that's only a prediction. And economists were forecasting the same thing at the start of 2004, only to be proved wrong.
Even though the Federal Reserve raised short-term interest rates five times in 2004, it did so only modestly. And surprisingly, yields on the 10-year treasury notes have not shot up, despite the Fed rate hikes. Yields on 10-year treasuries ended the year at 4.22 percent, down from 4.27 percent at the start of 2004. This would explain why the average bond fund rose nearly 5 percent in 2004, despite predictions of losses. Long-term government bond funds returned nearly 8 percent.
But fund managers are convinced that in 2005, stocks will outperform bonds. In fact, a recent survey of global fund managers by Merrill Lynch showed that U.S. bonds are forecast to be the worst-performing asset class this year.
Better bets. Jim Swanson, chief investment strategist for the asset management company MFS, says investors who continue to bet on bonds should probably consider short-term corporate bonds or perhaps Treasury Inflation Protected Securities, or TIPS.
Investment strategists predict the best place to make money this year is in foreign stock funds, particularly those that invest in the emerging markets. Emerging markets stock funds were among the best category of funds in 2004, generating total returns of nearly 24 percent. Latin American funds in particular were the absolute best-performing category of funds, returning more than 38 percent.
Right behind Latin American funds were real-estate portfolios, which rose more than 31 percent on average, according to Morningstar.
Despite forecasts of rising mortgage rates, real-estate investments continued to shine in 2004. Rising global demand for oil and commodities, thanks in large part to China's increased demand, also helped propel natural resources stock funds to gains of 28.5 percent.
The big question in 2005 will be whether the bull market in commodity prices has peaked or whether China's seemingly insatiable demand for raw materials like steel and copper will lead to ever higher prices. Just as Iraq was the big question mark for the markets in 2004, China may be the x factor in 2005.
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