Positive performance of midcap and small-cap growth funds propelled a few fresh faces into the quarterly list of top mutual fund performers among funds most used by defined contribution plans.
The average U.S. diversified equity fund was down 5.4% for the quarter ended Sept. 30, according to Lipper Inc., a data and analysis company in Summit, N.J.
Only two categories had positive returns for third quarter: small-capitalization growth funds, up 0.85%, and midcap growth funds, up 0.61%.
"Fund managers had a tough time finding high ground in such a broadly negative market," said David Hintz, senior research analyst for Frank Russell Co., Tacoma, Wash.
The small-cap renaissance that began in the spring continued through the summer, placing the Putnam OTC & Emerging Growth and INVESCO Dynamics funds among the top five mutual fund performers for the one-year period ended Sept. 30. It's the first time this year the Putnam small-cap fund has hit the top 50; the small-cap and midcap INVESCO Dynamics fund ranked 40th in the 12 months ended March 31 with a 16.4% return.
"It appears the stars are aligning for small-cap stocks, with the momentum continuing in that area," said Michael Mufson, a portfolio manager for the $5 billion Putnam OTC & Emerging Growth. The small-cap fund was up nearly 8% for the quarter while its benchmark, the Russell 2000, was down 6.3% for the period.
The Putnam OTC fund invests in small, emerging companies developing products for electronic commerce and other such high-tech businesses.
"As there is disappointment in the large-cap growth universe, the playing field becomes more level than it's been in years. We focus on small companies with typically one or two products, but they are the business leaders in their products, which are cutting-edge, revolutionizing the business world," Mr. Mufson said.
The Standard & Poor's 500 stock index was down 6.3% for the quarter ended Sept. 30, and up 27.8% for the 12 months ended Sept. 30. The S&P returned 28.6% in calendar year 1998 and 33.4% in 1997.
Who's on top
For the year ended Sept. 30, the top-performing equity fund among those most-used by defined contribution plans was the T. Rowe Science & Technology fund with a remarkable 108.7% return. It also was the leader for the year ended June 30. The fund also ranked well over the longer term, placing second for the five years ended Sept. 30 with a compound annualized 31.6%.
The strongest sector during the summer was science and technology, with the 127 such funds tracked by Lipper up a cumulative 7.02% for the quarter ended Sept. 30. The weakest sector was financial services; it accounts for 30% of the large-cap Russell 1000 Value index, which was down 9.8% for the quarter. Mutual fund investors shifted their money into money market funds and short-term fixed-income funds, according to Lipper.
More than 70% of the $6.9 billion T. Rowe fund is invested in electronic technology companies such as MCI WorldCom and Analog Devices, with between 10% and 15% exposure to Internet companies, which suffered during the quarter, according to the company.
Behind T. Rowe was the Fidelity Aggressive Growth fund with a return of 72.6% for the one-year period. It ranked third in the five-year rankings with an annualized 30.7%. The $6.4 billion fund focuses on midsize companies, but includes some large and small stocks as well. A few of the holdings include Qualcomm Inc., Exodus Communications and Qwest Communications International, according to fund data. About 14% of fund assets are invested in the health sector, primarily through Medtronics Inc. and Biogen Inc.
Bigger wasn't better
Large-cap growth funds were down 3.6% for the quarter ended Sept. 30, according to Lipper. The Janus Twenty's 54.6% return for one year landed the fund in fifth place this quarter. The Twenty was in third place last quarter and first place in the first quarter. It continues to rank first in the five-year ranking with a return of 35.6%.
The third quarter tilt in favor of midcap and small-cap growth stocks allowed the Putnam OTC Emerging Growth fund to take third place with a return of 62.2% for the 12 months. The fund ranks 53rd for five years with an annualized return of 21%.
Nearly 60% of the $5 billion fund is invested in midsize technology companies such as NextLink Communications, Exodus, Lycos Inc. and Metromedia Fiber Network, according to the fund's online review.
Also chiming in with third-quarter favor was the INVESCO Dynamics fund, which was up 56.8% for the quarter. It ranks 16th in the five-year ranking at an annualized 24.8%.
The $2.5 billion fund invests in midcap to small-cap growth companies, putting about 28% of total assets in technology stocks such as Tandy Corp., 17% in consumer cyclicals, 11% in consumer staples and 10% in communication stocks such as Exodus Communications and EchoStar Communications.
Value funds lost the lead over growth funds they had experienced in the second quarter, with small-cap value funds down 6.6% and midcap value funds down 8.9%.
High-yield and high-income funds were the third-quarter winners. More specifically, investors' love affair with high-yield corporate bonds for the period gave MainStay High Yield Corporate Bond fund a boost to rank third in the one-year listing, with 11.5%.
By and large, however, the same players that dominated the fixed-income rankings for the periods ended June 30 resurfaced in the top spots for the recent report:
* The Fidelity Capital & Income Fund led the one-year ranking of fixed-income funds, with a return of 17.2%. The fund also posted the highest one-year return for the period ended June 30 with a return of 9.6%. The fund ranks second in the five-year returns with an annualized 10.9%. The $2.6 billion fund invests mainly in debt securities and common and preferred stocks, with an emphasis on lower-quality debt securities.
* The Fidelity High-Income Fund ranked second for fixed-income funds based on one-year returns, up 11.9%. It leads the five-year ranking of fixed-income funds, however, with an annualized 12%. The fund invests mainly in high-yield debt securities with an emphasis on lower-quality securities.
* The MAS High-Yield Institutional fund was up 8.8% for the quarter, placing it fourth in the one-year ranking; the fund was up an annualized 10.8% for the five-year period, ranking third among its peers.
* The American High Income fund was up 8.1% for one year as of Sept. 30, ranking fifth; in the five-year listing, the fund ranked seventh with 9.3%.