Small-capitalization equity mutual funds continued their lead in the first quarter of 2005, but did not offer the dizzying returns seen in previous years.
Returns among the top 10 equity mutual funds most used in defined contribution plans were mainly in the mid- to high teens for the 12-month period ended March 31, compared to the heady 50% and 60% returns seen a year earlier, according to Pensions & Investments' quarterly survey.
Small-cap funds have historically proven their staying power in portfolios, offering better opportunities than large companies during economic slowdowns. It seems now, however, that small-cap stocks are showing signs of slowing down. The Standard & Poor's 500 index increased 6.7% for the 12-month period ended March 31, while the small-cap heavy Russell 2000 Index gained 5.4%. So far this year, the S&P 500 has handily beat the Russell 2000; the S&P returned -2.2% for the first quarter vs. -5.3% for the Russell 2000.
In the last several years, "value stocks did better, and small-cap value was the single-best place with the exception of real estate," said Preston Athey, manager of the T. Rowe Price Small-Cap Value fund, the survey's second-best performer for the five years ended March 31, with a compound annualized 18.3% return. "Ninety-five percent of the good fortune I had was being in the right sector."
On the fixed-income side, fortunes also dwindled from year-earlier performance. Performance was mainly dominated by high-yield managers, which accounted for five of the top 10 best-performing funds in the category for the year. The Lehman Brothers Aggregate Bond index rose 1.25%, while the Credit Suisse High Yield index gained 7.8% for the year ended March 31.