Lipper Research Analyst Don Cassidy on KTLK AM-760
Thursday, April 8, 2004
Q. Well, Don, last week we actually skipped talking about the firstquarter's results in order to focus on April Fools jokes that investorssometimes play on themselves...A. Right, and we are still just a few days into the new month so let'stake a look at Q1/04.
Q. What were the big themes you saw?
A. It was a time of contradictions, contrasts, and surprises.
Q. Examples?
A. The market was pretty strong for the first three weeks in January andthen stalled. Once the momentum broke, "everyone" expected a move downafter the 10 months of rallying, but the correction we have seen provedvery mild. Fits and starts, churning back and forth rather than makingmuch of a move either way. Lots of one-day reversals. And despite whatmost would call a stall or correction, the quarter still ended ahead(thanks to a late rally in March) a bit.
Q. So, what were the winners?
A. Here is where the contradictions and surprises come in.
- In an UP market, value beat growth (again!)
- Small still was beating Large-cap, despite evidence that the economicexpansion is broadening out.
- A very large majority of actively managed funds beat the S&P 500Index Objective Funds (more often it is the other way around)
- Telecommunication funds (+7.2%) were very strong, yet Science &Technology funds (+1.2%) were among the weakest types. Often the 2 runparallel.
- Real Estate funds, in an up market (!), were the domestic leaders bya wide margin, gaining an average 11.9% even while inflation worries wereup.
- Financial Service funds, despite the ongoing widening funds scandaland fears of rising interest rates, had an above-average gain of 5.1%.
- Gold Oriented funds, the winners in 2003, lost 1.4% for the quarterand actually had been down about 10% before a late rally.
Q. How about overseas?
A. Interesting, and bullish across the board. The weaker U.S. dollarcontinued to help boost fund returns of American world-equity investors.
Emerging Markets funds, led by Russia and India and China andespecially Latin America (+8.4%), were up 9.0% on average.
Europe (+2.1%) brought up the rear, hurt late by the Spanish trainbombings and the attempt in France.
Pacific Region, as one might expect in an economic expansion, was upa strong 10.5% on average.
But the big surprise was that the leadership came from (#1 overall)Japan funds, up 13.4%. Is their turnaround real this time?
Q. What about Bond Funds, Don?
A. Domestic long-term fixed-income funds gained 2.0% for the quarter, muchof it in the middle of the time window.
A lot of the gains were in short-duration and in TIPS bonds andfunds.
High-Yield funds underperformed late in the quarter despite the gainsin stocks (usually parallel), as spreads over quality yields got toonarrow.
Q. What should investors do?
A. As always, I caution against chasing recent performance. Gold fundswere an example in the first quarter, and now Real Estate funds have takena hard hit this past week. Start with asset allocation and try to buy thethings that have been out of favor for a while. Maybe take money off thetable where the party has been a lot of fun. It cannot last forever.Remember 1999 and then 2000-02? And by all means, don't try to TRADEfunds. The redemption charges will eat up your profits (if any). If youare shorter-term oriented, use ETFs instead of conventional funds!
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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