The year that index funds really roared Other funds trail as gap widens

Mutual funds

January 11, 1998|By Charles Stein | Charles Stein,BOSTON GLOBE

There are two ways for investors to look at the performance of mutual funds in 1997.

On one hand, the typical mutual fund lagged behind the Standard & Poor's 500 index for the fourth year in a row. In 1997, the gap was particularly large.

S&P 500 index funds managed a gain of 32 percent compared with 24 percent for the average general equity fund, according to preliminary numbers supplied by Lipper Analytical Services Inc., the New York firm that tracks mutual fund results.

"It's remarkable that passive market index funds with virtually no fee are significantly outperforming actively managed funds with a high management fee," said David O'Leary, president of Alpha Equity Research, a Portsmouth, N.H., firm.

Over the past three years, S&P 500 index funds have returned an average of 30 percent, compared with 25 percent for stock funds in general.

The index funds also have better numbers for the past five years and 10 years.

On the other hand, general stock fund investors in 1997 did chalk up their third year in a row with gains of 20 percent or better. In the greater scheme of things, it's hard to get too depressed about returns like that.

The continued success of S&P 500 index funds -- which are designed to mimic the performance of the 500 stocks in the index, a proxy for the broader stock market -- was one of the important trends in mutual funds during the past year. Other developments included:

A weak year for small-capitalization stock funds. Once again, big was beautiful on Wall Street as giant multinationals such as General Electric Co., Microsoft Corp., and Merck & Co. turned in stellar numbers.

FTC Smaller stocks did not fare as well, especially after the Asian crisis unfolded in the fall.

Investors reasoned that smaller companies, especially technology companies, were more vulnerable to Asia's troubles. Big stocks, by contrast, benefited from a flight to quality.

The bottom line: Small-cap funds returned 20 percent for the year, far less than the gain managed by index funds, which are dominated by big stocks.

A difficult year for international funds. It is conventional investing wisdom: You should have a portion of your money invested overseas.

That strategy may eventually prove useful. It certainly wasn't in 1997. The average international fund returned 5 percent.

The villain, of course, was Asia. Depending on the mix of countries, Asian funds were down anywhere from 15 percent to 35 percent last year. Japan funds did somewhat better -- or more precisely, not as horribly -- as funds that were invested in the rest of Asia.

European and Latin American funds turned in gains of 15 percent and 25 percent, respectively.

Financial services funds had another great year. The 1990s have been a great time to have your money in companies that handle money.

The combination of a growing economy, falling interest rates, and rising stock prices has proved ideal for the finance business. Financial services funds advanced 45 percent last year.

Over the past five years they returned 25 percent annually, making them far and away the best fund-sector investment over that period.

Technology funds, the runner up, had an average annual return over five years of 21 percent.

Gold funds had another awful year. Gold funds followed the price of gold down, losing 41 percent for the year.

Over the past five years, gold funds had an annual return of less than 1 percent.

The year just ended had two distinct periods for investors. Stock prices rose steadily until the summer.

After that they moved sideways and occasionally down.

The fourth quarter of the year was a particularly tough time for stocks, so not surprisingly it was a difficult time for mutual funds.

The average stock fund lost just over 1 percent in the quarter and few categories of funds escaped the damage. Losses were significant in funds that invest in small stocks, technology, and natural resources.

The last group was hurt by the decline in oil prices. International ,, funds and Asian funds recorded double-digit declines for the quarter.

Among the only groups that avoided the carnage were financial funds and utility funds. Utility funds gained 10 percent for the quarter, leading all other categories of funds.

According to Lipper, it was the first time since 1981 that utility funds led the pack in a quarter. Utility funds tend to do well in times of falling long-term interest rates.

Rates fell sharply in the fourth quarter in response to good news on inflation and bad news from Asia.

Pub Date: 1/11/98

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