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Tue, Jun 13, 2000
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The Year in Mutual Funds: The
S&P; 500 Cools Down, But Tech
Still Rules
By Peter Di Teresa    

Nineteen ninety-nine was not more of the same-old, same-old.

After four years of tormenting active managers, the S&P; 500 wasn't the only game in town. In fact, fund categories that had seen more disdain than dollars in recent years made amazing comebacks.

Change was the rule for management, too. Jim Craig announced that he'd be leaving Janus Fund JANSX after 13 years at the helm. The Bogles lost their jobs: John Bogle Jr. left Numeric Investors and founded his own fund company while dad retired from Vanguard's board.

If you didn't like change, at least you could take heart in technology's reliable dominance and value's unending submission. How heartening you found that depended, of course, on which of the two you owned.

The S&P; 500 Returns to Earth

Call it the surprise of the year. The S&P; 500 index didn't once again steamroll everything else. In fact, the index was up a relatively moderate 19.5%. That's still way ahead of the index's historical average of about 12%, but it's a lot closer to normality than the 30% annualized return the index enjoyed from 1995 through 1998.

If we see more of this, people might even develop reasonable expectations for stocks. And we were all due a reminder that large-cap land isn't the only place to find investment opportunities.

Some Longtime Sufferers Revive

If an investor saw a stock certificate from Japan, an emerging market, or a small- or mid-cap growth company lying in the street a year ago, he or she was more likely to step over it than grab it. In retrospect, that kind of reticence was regrettable. Through December 31, the slowest moving of these four categories, mid-cap growth, was up 60.9% for the year to date. The average Japan fund blasted to a 121% return.

Too bad for those of us who didn't show compassion when these funds were in the gutter. Small- and mid-growth funds still could offer good opportunities, though. The average mid-cap fund's three-year return is two thirds its large-cap counterpart's. And the average small-cap fund has gained just half as much as the average large-cap offering.

Tech Rules, Value Submits

Technology funds closed in on their eighth year this decade of trampling the S&P; 500. The average specialty-technology fund was up 136.5% for the year.

Nineteen ninety-nine may have been sweetness and light for tech investors, but it was another bitter year for dedicated value investors. After roaring through 1997, the average value fund ground to a halt in 1998 as many cheap stocks only got cheaper.

Small-value funds, the hardest-hit group, retreated 8% on average. This year didn't prove much friendlier to value investors: Large value eked out a 6.3% gain, with small value up just 4.8% and mid-cap value returning 6.2%.

If being eclipsed spells opportunity, these funds should be prime picks. The market is down on their holdings and investors are down on the funds--small-value funds have been losing shareholders for the past couple years.

Janus Rebels Against Its Parent

Investors enthused over the Janus funds last year, and 1999 only cemented their affections. The average Janus stock fund's returns landed in the top quintile of its category in 1999. That success was particularly impressive as Janus could easily have been distracted this year by familial strife.

Simply put, Janus managers felt they weren't getting the compensation they deserved. Thus, they wanted their fund family spun off from parent company Kansas City Southern Industries KSU, a railroad. It was no trivial matter: When former Janus Twenty JAVLX manager Tom Marsico struck out on his own two years ago, it was supposedly over that very issue.

Realizing that retaining Janus funds without their star managers would be a pyrrhic victory, Kansas City Southern agreed to a spin-off. At the same time, the company proffered a plan that seemed designed to stick in Janus' craw. The spun-off company will include not only Janus, but also the Berger fund family, data-processing company DST Systems, and a small British firm called Nelsons Money Managers. The resulting holding company will be called Stilwell, rather than playing off the powerful Janus brand. As far as Janus management is concerned, those features are all ballast. But at least the managers aren't taking their leave.

Peter Di Teresa is a senior analyst with Morningstar. He can be reached at peter.diteresa@morningstar.com

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