Subject: [NEXTEL-1] Mutual Fund Statements Might Surprise Investors

From: Marcel <[email-masked]>
Date: Fri, 03 Jan 2003 12:04:21 -0500

Mutual Fund Statements Might Surprise Investors
Source: The Dallas Morning News
Publication date: 2003-01-02

Jan. 2--Investors may get the heebie-jeebies just thinking about opening
their quarterly mutual fund statements this month.

But it's OK – tear into those fourth-quarter statements, because a pleasant
surprise may await. The headlines were scary and the markets were volatile,
but most fund investors made money in the fourth quarter.

"The quarter didn't feel very good, because we got off to such a nasty start,
and we didn't end the period very well either," said Christine Benz, editor of
Morningstar FundInvestor, a newsletter for small investors. "But sandwiched
in there was one heck of a rally."

The stock market hit what seemed to be its bear-market bottom on Oct. 9,
with the three major averages below their previous bear market lows of late
summer. At that point, the Dow Jones industrial average had lost about
one-third of its value since 2000, and the Standard & Poor's 500 index had
given up about half.

But after that plunge, the market spent the rest of October and much of
November on a steep upward trajectory that restored 1,700 points, or 24
percent, to the Dow. The technology-laden Nasdaq composite index climbed
an impressive 34 percent.

Stocks spent most of December in a serious funk – in fact, it was the worst
December for the Dow since 1931 – and some of the quarter's previous
gains were trimmed, but the final tally was still positive. The average U.S.
diversified stock mutual fund gained about 6 percent in the quarter,
according to preliminary estimates from Lipper Inc., which tracks mutual
fund performance.

This was a dramatic turnabout from the third quarter, when the average
stock fund dropped 14.3 percent.

"The market was really sold out after Oct. 9, and no area was more oversold
than technology," said Larry Puglia, portfolio manager of the T. Rowe
Price Blue Chip Growth fund. "We bought some of the beaten-down tech
stocks in October, and that really helped us for the quarter."

Mr. Puglia's fund was up about 14 percent for the quarter, but stout gains
were the norm with almost every mutual fund category posting good results.
The average large-cap growth fund, one of the largest and most popular fund
categories, posted a 4.8 percent gain. Even with that performance, however,
this category still remains down 28.6 percent for the year.

Another popular category – large cap value – gained 8.2 percent in the
quarter, but like the growth category, it remains in negative terrain for the
year, down 20.2 percent.

Value stock funds typically buy slow-growing, more mature companies,
while growth funds buy faster-growing, often more immature companies.

Bond funds also continued to post some respectable gains for the quarter,
adding to the already stellar performance of the previous three quarters. For
example, the average corporate bond fund gained about 2.6 percent in the
quarter and is up 4.6 percent for the year, according to Lipper.

Michael Kennedy, manager of the Stein Roe Liberty Intermediate Bond fund,
explained that falling interest rates have provided a nice tailwind for bonds,
since bond prices rise as interest rates fall. At the beginning of the year, the
benchmark 10-year U.S. Treasury bond was yielding 5.1 percent, but it has
fallen to its current yield of 3.8 percent.

"The market finally realized that there was tremendous value in corporate
bonds," Mr. Kennedy said.

The best-performing category among all the diversified U.S. stock funds –
which basically excludes international funds and so-called sector funds –
was S&P 500 index funds, with an 8.2 percent gain.

The basic strategy of index funds – and there are more than 170 of them –
is to invest in all the stocks of a given index, such as the S&P 500, the
Nasdaq or even the Dow Jones industrial average.

No effort is made to try to select the best stocks, just all the stocks, and
the portfolio managers typically invest all of the cash that comes in.

This differs from the active portfolio managers, who buy and sell any stocks
they want, when they want, and often keep some cash in reserve.

The popularity of index investing caught fire in 1995, when the S&P index
soared 37.6 percent. George Sauter, managing director at the Vanguard
Group, one of the nation's largest mutual fund companies, said his
Vanguard 500 Index fund outpaced the typical large-cap fund in the quarter
primarily because the fund was fully invested in stocks throughout the entire
quarter.

"When the S&P came back in October and November, being fully invested
obviously was a good thing," Mr. Sauter said.

Advantage indexes Further, he said, index funds often outperform actively
managed funds because expenses are lower.

The expense ratio of the Vanguard 500 fund is 0.2 percent, compared with
1.4 percent for the average stock fund.

Perhaps the quarter's most dramatic recovery occurred in two of the sector
funds – telecommunications and technology. Both categories were down
more than 20 percent in the third quarter, but the average telecom fund
soared 23.7 percent in the fourth quarter and the average tech fund was up
17.3 percent.

For example, Houston-based Aim Global Science and Technology fund
gained 34 percent from its October low to early December.

It has since fallen back, but the fund still posted a nice 16 percent gain.

Abel Garcia, manager of the Aim Technology fund, said his fund was
supercharged by owning shares of Nokia Corp., a manufacturer of mobile
phones that has its U.S. headquarters in Irving. Nokia shares soared from
about $12 a share in early October to just over $21 by early December. The
stock has since retreated to just below $16.

Mr. Garcia also said his fund was helped along by its stock in Nextel
Communications Inc., a provider of wireless service.

Nextel shares galloped from about $7 to $14 before settling back to just
below $12.

However, Mr. Garcia said he wasn't overly impressed by the
October-November rally because the fundamentals of the technology sector
haven't improved much in recent months.

In other words, there hasn't been a lot of improvement in companies'
spending on capital equipment, such as new computers and networks.

Earnings of telecom and technology companies will have to drastically
improve in the first half of 2003 to re-ignite the rally.

"The fundamentals of the business just haven't improved," Mr. Garcia said.

Another dramatic story in the quarter occurred in a fund category that is
focused outside the United States – Latin America. The average fund in this
category rose 17.4 percent, erasing about half of the category's year-to-date
loss.

Improvement in the political and economic climate of Brazil accounted for
most of this performance, said Andrew Clark, a mutual fund analyst at
Lipper. Earlier in the year, the Brazilian currency, the real, dropped about 40
percent on concerns over the impending election of Luis Inacio Lula da Silva
as president.

But shortly after being elected president in October, Mr. da Silva, a union
radical and leftist political leader, reached out to the financial markets with
some calming words.

He promised, for example, to move slowly on the economic front and to
create an autonomous central bank.

Although this was an excellent return, this is one of the smallest fund
categories tracked by Lipper. It has less than $1 billion in assets, compared
with more than $800 billion in large-cap funds.

-----

To see more of The Dallas Morning News, or to subscribe to the newspaper,
go to http://www.dallasnews.com.

(c) 2003, The Dallas Morning News. Distributed by Knight Ridder/Tribune
Business News.

MSTR, NOK.A, NXTL,

Publication date: 2003-01-02

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