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Trophies and Dunce Caps for 2007

01/09/2008 12:00 am EST


Janet Brown

President, FundX Investment Group

Janet Brown, editor of NoLoad Fund*X, tells which fund groups led and which lagged last year—and she looks at which ones might set the pace in 2008.

While the broad US market struggled under the weight of the credit crisis, sectors like technology, energy, and materials posted remarkable gains [in 2007]. Uncertainty about the housing market, credit-crunch, and strength of the economy took its toll [on] financial company earnings, but earnings in many other sectors remained strong.

Of the major US indices, the tech-heavy NASDAQ [Composite index] ended with the calendar year’s biggest gain, 9.8%—its best showing since 2003. Next came the large-cap Dow Jones Industrial Average with a total return of 8.7%. The broad market Standard & Poor’s 500 index, including dividends, gained 5.4% for the year. Coming in last, the small-cap Russell 2000 Index lost 1.6% in 2007.

Overall, [funds’] annual returns were the smallest since 2002 and below the US market’s 10% historical average, but 2007’s top fund groups suggest that investors would do well to recognize that following market leadership can be profitable even in mediocre years.

Growth-oriented strategies and sectors led, and larger-cap funds were generally stronger than smaller caps. The year’s best-performing US fund group was mid-cap growth, up 17%. Large-cap growth portfolios finished a close second, rising 15%. By comparison, small-cap growth funds managed a 9% yearly gain.

Value funds trailed their growth counterparts in 2007 for the first time since 1999. Large-cap value funds squeaked out a 3% annual gain, while mid-cap value funds finished the year up 2%. Small value funds, heavily exposed to financial services and consumer-related stocks, were hit hardest of any major category, down 5% for the year,

Natural-resources funds surged 40% for the year. Utility funds came in second with a 20% annual gain. Technology funds staged an impressive comeback, up 16% on the year, and health care funds added 10%.

On the downside, the subprime debacle sacked real-estate funds for a 15% annual loss. Financial-services funds fared only slightly better, down 13% on the year.

Foreign stock markets extended their winning streak in 2007, outperforming the US for the fifth year in a row. The Dow Jones World Stock Index, excluding the US, returned 12% last year in dollar terms, compared to the 6.4% gain for the domestic Dow.

Emerging markets funds once again enjoyed the largest gains. Latin American funds extended their winning streak to a fifth straight year of tremendous gains. Outside of Japan, Asia was strong. The biggest winners were China, Hong Kong, and India. Japan was down 11%. Developed markets weakened in line with the US, and European shares mostly failed to keep up with their US counterparts.

The weak US dollar once again magnified gains overseas. For instance, Brazil gained 43% in local currency and 71% in US dollars. Canada gained 8% in local currency and 27% in dollars. The dollar lost about 10% against the euro [and] 6% against Japan’s yen and gained about 2% on the British pound sterling.

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