A hint of optimism for mutual funds

Caution: Today's jittery investors will prefer funds that are more GE than gee whiz.

January 21, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

A year ago, investors couldn't put their money fast enough into technology and growth stock mutual funds.

That was then.

After 2000 delivered some bruising losses, particularly in the technology sector, many mutual-fund investors are expected sit on the sidelines this year. While they will likely continue to automatically invest in funds through retirement accounts, they will wait for some sure signs that the economy and corporate earnings are strengthening before throwing extra dollars into funds, some experts said.

Al Kugel, senior investment strategist for Stein Roe & Farnham in Chicago, said interest rate cuts might help stimulate the economy and the market, and boost cash flows into mutual funds by the second half of the year.

"It's going to be better than 2000; 2000 has turned out to not be a very fun year," he said.

Those who venture into funds this year will likely find bright spots, some market experts said. Among this year's winners, they said, will be some of last year's losers.

Sometimes what "looked ugly" one year, enjoys a rebound the next, said Tal Daley, director of Legg Mason Inc.'s mutual fund marketing unit in Baltimore. "You have to understand why it was ugly and make sure it isn't for some long-term reasons."

Daley is optimistic that technology funds will rebound this year. Stock prices of some of the best technology companies had fallen by the end of last year to levels not seen since spring 1999, Daley said. According to Lipper Inc., the fund tracking company, tech funds on average fell 33.9 percent last year.

International funds, too, were a disappointment last year, but poised for improvement, some experts said. World equity funds, which include international funds, were down 17.3 percent last year, Lipper reported.

Daley favors European-focused funds because countries there are cutting taxes and some are switching from expensive welfare and pension systems to 401(k)-type plans that promote investing.

Investors interested in Asia may find better returns with funds that have shares in companies in China, South Korea and Taiwan rather than in Japan, whose economy is expected to continue to lag, Daley said.

Many expect large-cap growth funds - they generally invest in big name companies - will make a comeback this year after falling on average 16.2 percent, according to Lipper, last year.

"Almost all investors are in a state of confusion," said Al Goldman, chief market strategist for A.G. Edwards & Sons Inc. in St. Louis. "As they start getting back into the market, they will be nervous and stick with motherhood stocks. They will buy GE, not gee whiz."

Some of last year's star performers, too, may continue to shine this year, such as value funds that invest in good companies trading at low prices because they have temporarily fallen out of favor on Wall Street , experts said."[Last year] was clearly one of value's years. They don't come around very often," said Edward Rosenbaum, Lipper's director of research in New Jersey.

Large-cap value funds rose 1.32 percent last year, a small increase but good results compared with the drop in large-cap growth.

Small-cap value funds were up 17.7 percent last year and mid-cap value funds rose 16.6 percent, according to Lipper.

David Reilly, senior vice president and director of investment communications at Prudential Securities in Boston, said some of the best value opportunities will occur in small- and mid-cap companies, or those with market values under $15 billion. There are still plenty of stocks in these categories to pick over, he said.

Although investors pulled $47.6 billion out of bond funds during the first 11 months of last year, many of those funds on average posted healthy gains. U.S. government funds, for example, were up on average 11.7 percent, general municipal funds rose 10.8 percent and corporate bond funds increased 8.96 percent, according to Lipper.

"People should have put money in bonds in March and April. They didn't. They were buying stocks," said Robert F. Mewshaw, president of Van Sant & Mewshaw in Lutherville.

Some experts predict bond funds will perform well this year, too, and attract investors.

Many experts don't predict a repeat of last year when cash rushed into mutual funds, building on the technology momentum of late 1999.

Net cash flow into stock funds alone for the first 11 months of last year reached $297.4 billion, compared with $162.8 billion for the 11 months in 1999, according to the most recent figures from the Investment Company Institute, a mutual fund trade association in Washington.

The stock funds that received the most money last year were aggressive growth, growth or those that invested in certain sectors, such as technology, telecommunications and biotechnology, ICI reported. Most of the dollars poured in during the first quarter when the Nasdaq composite index, heavily weighted with technology stocks, was soaring to a record high.

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