NEW YORK -- In a quarter where the year-long stock market rally ran out of steam, most stock mutual fund returns were minimal at best, with only a handful of fund categories, including small-cap, real estate and Asian funds, posting any meaningful results.
Most stock funds gave back the gains they enjoyed in the Wall Street's New Year's rally, according to statistics released Friday from mutual fund watcher Lipper.
Small-cap funds, which typically include up-and-coming companies from a variety of categories, tend to have more risk, but were one of the leaders in last year's stock rally and carried their momentum into 2004. Small-cap value funds had a 3.06 percent return in the first quarter to lead all U.S. diversified equity funds and posted a 56.05 percent return for the year ending March 31. Small-cap core funds had a 2.74 percent return for the quarter, and 55.58 percent for the past year.
"We were taking a look (at) potentially having 2004 as when small-caps level off a bit, but they're still doing better than anything else," said Martin Vostry, a research analyst at Lipper. "The lower interest rates are continuing to help them substantially with cheap capital, and as investors look at the returns, they're jumping in, so you see some momentum buying as well."
International funds had the strongest overall returns for the quarter, prompted by a strong economic recovery in Japan. The 52 Japanese funds Lipper tracks boasted a 10.66 percent return for the quarter, leading the international fund category. Pacific region funds had an overall 7.63 percent return.
"Japan has been THE story in mutual funds over the past several weeks," Vostry said. They've been outperforming even as other funds have been falling. This time, there's something different going on. Their domestic economy is doing better and foreign investors are going into that market."
Of the 25 largest mutual funds, international fund American Funds EuPc;A led the returns with a 4.67 percent return for the quarter.
Real estate funds led all the sector specific funds Lipper analyzed, with the 198 real estate funds posting a collective 10.39 percent return for the quarter. The second best sector was telecommunications, which, according to Vostry, had lagged behind other technology stocks due to overall weakness in the sector through most of 2003.
"They were late to the party last year," he said, "but they worked through their problems and were undervalued until recently. That made them a good buy."
Despite the weak quarter on Wall Street, only a handful of fund categories had negative returns. These were led by large-cap growth funds and large-cap core funds, which both had a negative return of 0.48 percent. S&P 500 index funds, which track the Standard & Poor's 500 index, fell right along with the index, posting a 0.02 percent negative return.
Vostry said a comparison between large-cap growth funds and the more conservative large-cap value funds, which had a positive return of 0.41 percent for the quarter, showed that while most sectors kept pace evenly, the riskier growth funds had a higher stake in technology. And just as tech shares helped lead the 2003 rally, they were one of the first sectors to give up their gains in the first quarter.
In fact, the only major sector group to record a negative return for the quarter was science and technology funds, which had a 0.88 negative return. For the past year, however, science and technology funds have a positive return of 54.87 percent.
The worst-performing fund of the 25 largest funds, the Nasdaq-100 Trust 1 fund, mirrored the Nasdaq 100 and had a negative return of 2.85 percent, but still has a positive return of 39.93 percent for the past year.
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