Dian's Column
Dian's Archive



With half of the year behind us, it's any body's guess as to which fund type will be the all-out winner for 1999. But if there is a trend developing, maybe ---just maybe---it's that S & P 500 Index funds might not show the same strength going forward as they did in 1998. Or 1997. Or 1996. Or 1995. Or even 1994.

For the last handful of years, socking some money into an S & P 500 Index fund has paid off handsomely: From June 30,1994 to June 30, 1999, S & P 500 Index funds returned on average 27.31 percent per year to their shareholders, according to Lipper Inc. That's well ahead of the 20.63 percent average annual total return on any of the different types of funds that make up Lipper's General Equity Funds group. That group is made up of eight various fund types including: capital appreciation funds; growth funds; mid-cap funds; small-cap funds; micro-cap funds; growth and income funds; S & P 500 index funds; and equity income funds.

So, if S & P 500 Index funds don't wind up being the hot-shot general equity funds performance winners this year, which types will be? Without privy to an accurate crystal ball, it's impossible to be certain. But, if numbers are any indication, it might be the mid- cap funds, small- and micro-cap funds. The latter, for example, making big performance strides lately.

Year-to-date numbers show the average micro-cap fund up 20.14 percent. Take a tighter look and for the quater, micro-cap funds were up over 20 percent. That's more than double the returns on general equity funds.

Bob Kern is portfolio manager of the Fremont U.S. Micro Cap Fund, (800-548-4539). It's up 23.39 percent so far this year. Kern hopes that the strong second-quarter performance of micro-cap stocks trigger a continuing trend.

"Perhaps the second quarter is a turning point where the trend is going to continue for two to three more years. But it's hard to tell," says Kern who has managed Fremont's U.S. Micro Cap Fund since it's inception five years ago.

He points out that because small- and micro-cap stocks have been out of favor for years, cash flows into them have been nothing to rave about. Until recently, that is. "We do need positive cash flows and interest to get consistent positive rates of returns for this asset class." says Kern.

Then there are the mid-caps. Up on average over 12 percent for the quarter, and, year-to-date as well.

The Oberweiss Mid-Cap Fund, (800-323-6166), up nearly 22 percent so far this year, is managed by Jim Oberweiss, Jr. Like the small- and micro-cap stocks, he says that mid-cap stocks have gotten" beat up pretty badly" over the last couple of years too.

"The market has simply favored large company stocks up until this quarter when we saw a shift to the small- and mid-caps, " say Oberweiss who has been managing the fund since it began in September 1997.

Chris McHugh, portfolio manager of Turner Mid-Cap Growth Fund, (800-224-6312), agrees. He said that this is the first quarter in which the Russell Mid-Cap Growth Index, the Russell 2000 Growth and the Russell 2500 have outperformed the S & P 500 since 1997.

"Now one quarter is not a trend, by any means," says McHugh whose fund is up almost 20 percent this year." But in mid-cap stocks you get the best of both worlds. You get the liquidity of large cap stocks along with the attractive high growth returns of small cap stocks."

If you've not been a micro-, small- or mid-cap fund investor and would like to diversity your holdings to include them, the pros say you don't have to sell the farm to participate. Kern said that having 5 percent exposure to micro-caps would be a fair representation. Oberweiss suggests between a 5 and 25 percent allocation to mid-cap stocks might be appropriate depending upon your age and tolerance for risk and market volatility.

No matter what you decide, if there's a lesson from the second quarter performance numbers that we can take to the bank, it's a simple one: Markets change.

To read more articles, please visit the column archive.

[ top ]