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Monday October 2 2:46 PM ET
Mid-Cap Funds Pleased, Outlook Rosy
By Cal Mankowski
NEW YORK (Reuters) - A shift away from big growth stocks to medium-sized and even smaller companies may be at an early stage, say fund managers who have been on the right side of the sea change in the just-concluded third quarter.
``The trend is not over, it's really just getting started,'' said Richard Jandrain, senior managing director for equities with Banc One Investment Advisors.
According to preliminary data for the third quarter released on Monday by fund trackers Lipper Inc., the average diversified stock mutual fund was up 2.65 percent.
Of the diversified funds, mid-cap ``core'' funds were up 7.04 percent to lead other categories, while mid-cap value funds were up 6.74 percent and small-cap value funds were up 6.54 percent.
Large-cap growth funds, the pacesetters in the latter half of the 1990's, were down 0.66 percent in the quarter while large-cap core funds had a decline of 0.37 percent. Large-cap value funds were up 3.34 percent, according to the Lipper data.
While the Dow industrials were up nearly 2 percent in the third-quarter and the Russell 2000 had a gain of not quite 1 percent, the widely-used Standard & Poor's 500 benchmark was down just over 1 percent and the tech-heavy Nasdaq composite was down more than 7 percent.
Jandrain said funds investing in technology stocks were clearly the leaders in 1998 and 1999. But high valuations relative to earnings, coupled with a few well-publicized disappointments, finally prompted investors to begin looking elsewhere. The trend had actually started early this year and became quite noticeable toward the end of the first quarter when the Nasdaq composite began a major retreat.
Lately, some big companies have faltered after announcing that third-quarter earnings will be hit by the weak euro currency.
``The big risk is that a lot of these companies have significant revenues in Europe and the euro has lost over 20 percent of its value vs. the dollar,'' said Thyra Zerhusen, manager of the Alleghany Talon Fund which invests in mid-cap stocks.
``When foreign revenues are translated back to dollars it looks pretty weak,'' she said, adding she would not be surprised to see a few more earnings ``bombs'' in coming weeks.
Jandrain said that many mid-cap stocks simply do not have the same international exposure that the bigger companies have. ''That's one of the problems you don't have to worry about if you're primarily domestic,'' he said. ``It definitely helps the mid-caps.''
Many funds got a boost from rebounding financial stocks in the quarter just ended, Jandrain said. Mergers and acquisitions drove brokerage and asset management stocks higher while improved industry fundamentals gave a boost to insurance stocks, he said.
Zerhusen said specific stocks that have done well for her in the third quarter include McKesson HBOC Inc. (NYSE:MCK - news). a distributor of health care products, and Mentor Graphics Corp. (NasdaqNM:MENT - news), which provides hardware and software for the electronic design automation industry.
Zerhusen said there were a couple of reasons why mid-caps could continue to outperform.
She said forecasts for better growth rates, combined with more reasonable price-to-earnings valuations, favors mid-caps over large-caps. In addition, she thinks money will continue to rotate out of big caps and into mid-caps.
``The phenomenon can go on for quite some time,'' she said.
The Lipper data also showed that active managers continue to have the upper hand over index managers.
While 14 of the 15 categories of diversified stock funds all had gains for the quarter, funds specifically trying to match the S&P 500 were down 1.06 percent.
Among stock funds focused on specific industry sectors, financial services funds were in the forefront with a gain of 21.11 percent while telecommunication funds remained in the doghouse with a decline of 7.26 percent.
On a year-to-date basis, the diversified funds were up 6.46 percent wile sector funds of all types on average were up 15.92 percent. |
