Modest 4th-quarter gains extend lead
NEW YORK — Funds dedicated to growth companies had surprisingly solid gains for 2007, withstanding market turbulence that usually pummels that volatile category of funds.
A tally of mutual fund performance for the year by Lipper Inc. found that one of the broadest mutual fund categories — large-cap U.S. growth funds — had an average return of 14.9 percent for the year despite a tiny 0.55 percent return for the difficult fourth quarter. Large-cap U.S. value funds, by comparison, showed an average return of 2.7 percent for the year after showing a negative return of 4.3 percent in the quarter.
Growth stocks are seen as likely to show earnings or revenue gains that will outpace rivals. They generally don't pay sizable dividends like the more established names referred to as value stocks. Some investors regard the momentum driving growth stocks as a safer bet should the overall economy begin to lose steam.
"We saw growth starting to pull away
from value in late 2006. People had expected growth to assume the mantle during 2006 and to some degree it did but this year that difference was strongly pronounced," said Lipper analyst Jeff Tjornehoj.
Tjornehoj expects many investors will still find growth funds attractive in 2008.
"Even though people are often told not to buy into the hot market or hot sector, the transition from value to growth has taken long enough that when they look back on the performance of their funds, people are going to notice that 'Yes, indeed, value is suffering right now.' "
In total, U.S. diversified stock funds lost ground in the fourth quarter.
These funds, which tend to have varied holdings rather than focusing on a particular sector, had an average negative return of 2.6 percent during the fourth quarter but did show a return of 6.9 percent for the year, according to data from Lipper Inc. calculated two trading days before the end of the quarter.
"There were definitely bright spots out there and if you were a diversified investor you did take part in that success," Tjornehoj said.
Stocks often cap the final three months of the year with a rally as investors try to burnish their returns. In the fourth quarter, however, recurring concerns about the housing market and the effects of faltering mortgage loans on the financial sector weighed on investors and poked holes in the short-term performance of some funds.
Investors' distaste for real estate and the financial-services companies was clear. Many financial companies are struggling with bad mortgages on their books.
Real estate funds had a negative return of 12.3 percent for the quarter and 14.9 percent for the year. And financial services funds had a negative return of 9.8 percent on average in the quarter and ended the year with a negative return of 13.3 percent.
Many mutual funds traced a similar path to the broader market, losing ground in the quarter but still showing gains for the year.
With one trading day remaining, the Dow Jones industrial average has given up about 3.8 percent during the quarter, while the broader Standard & Poor's 500 index is off 2.9 percent and the technology-heavy Nasdaq composite index down 1 percent. For the year to date, the Dow is up 7.24 percent, while the S&P 500 is up 4.24 percent and the Nasdaq is up 10.73 percent.
Concerns about an economic slowdown meant even some of the year's strongest performers ceded some ground during the quarter. Funds that invest in China, for example, came off their highs of the year.
Among other funds that invest in specific sectors, funds that invest in the natural resources and utilities categories fared well as investors scrambled to profit from rising prices for energy and other commodities. The anemic dollar and demand for fuel have pushed commodity and fuel prices higher in the U.S. Meanwhile, burgeoning economies from China to India have only added pressure for resources.
Natural resources funds showed an average return of 7.4 percent in the fourth quarter, boosting the year's return to 40 percent. Meanwhile, utility funds had an average return of 5.3 percent; for the year, the return was 19.8 percent.
Tjornehoj warned, however, that despite the big numbers shown by natural resources funds in 2007, it could be difficult for these funds to reproduce such steep gains in 2008. Some of the funds invest in companies involved in oil production, for example, and have benefited from rising prices.
"Natural resources had a very good year. It has matched the price movement in oil. That said, getting another 40 percent return or something even in that neighborhood might be difficult because that presumes oil may go up another 20-30-40 percent," he said.
China also benefited other funds as well in 2007. China region funds had a negative return of 3.8 percent for the quarter but still had a return of 54.5 percent for the year.