U.S. equity mutual funds rose 8.7 percent in 2007, the least in two years, as the collapse of the subprime-mortgage market dragged down shares of real estate and financial companies.
Funds that invest exclusively in property shares tumbled 13 percent, and those that buy stocks of banks, securities firms and mortgage companies fell 11 percent, the two worst-performing groups through Wednesday, according to research firm Morningstar Inc., of Chicago. Bond funds gained 2.8 percent, half the pace of the previous year.
Stock funds suffered as losses from the worst residential real estate market in 16 years sent the Standard & Poor's 500 index down 1.4 percent this quarter, including reinvested dividends, reducing the annual return to 7.6 percent. The increase was the smallest since 2005, when the benchmark for U.S. equities returned 4.9 percent.
"The slump in financials had a big influence on how the returns shook out for the year," Morningstar analyst John Coumarianos said.
The $196 billion Growth Fund of America increased 12 percent as managers from Los Angeles-based the Capital Group Cos. Inc. profited from investing more than 20 percent of assets in technology, media and telecommunications companies.
The best performer among the 10 largest funds was Fidelity Investments' $80 billion Contrafund, managed by Will Danoff, which rose 21.3 percent, according to data compiled by Bloomberg. The $45 billion Magellan Fund, led by Boston-based Fidelity's Harry Lange, climbed 20.6 percent.
The worst was the $66 billion Dodge & Cox Stock Fund, run by a nine-member team in San Francisco, with a 2.1 percent return.
Kenneth Heebner's $3.5 billion CGM Focus Fund jumped 81 percent, the most by a diversified stock manager. Heebner, based in Boston, poured 35 percent of assets into oil producers and services companies and 17 percent into mining shares.
Energy funds were the top U.S. performers, gaining an average 38 percent. Oil rose 57 percent this year on demand from emerging markets. The No. 1 actively managed energy fund was John Dowd's $2.3 billion Fidelity Select Energy Service Portfolio, which climbed 55 percent.
The $532 million Franklin Real Estate Securities, run by Alex Peters of San Mateo, Calif.-based Franklin Resources Inc., was the biggest loser among property funds, falling 26 percent. The worst performing financial fund was the $148 million Fidelity Select Home Finance, overseen by Dick Manuel, with a 38 percent drop.
Growth stocks outpaced value shares for the first time since 1998. Value investors buy shares of companies they perceive as cheap relative to financial yardsticks including earnings, while growth managers buy shares of companies whose profits are increasing the fastest.
The Russell 1000 Growth Index advanced 14 percent, and the Russell 1000 Value Index gained 1.6 percent, including dividends.
Janus Capital Group Inc. manages three of the industry's top five growth funds. The $1.3 billion Janus Aspen Forty Portfolio rose 40 percent, almost three times the rate of the average competitor. Its 10 largest holdings include Research in Motion Inc., maker of the BlackBerry e-mail phone; Google Inc., owner of the most widely used Internet search engine; and Apple Inc., maker of the iPhone and iPod. Their shares doubled on average.
"Technology companies with cutting-edge products, like Apple, Research in Motion and Google, have been a tremendous success in 2007," said Gibson Smith, co-chief investment officer of Denver-based Janus. "That has been a big theme."
High-yield municipal bond funds dropped 3.7 percent, the worst fixed-income performers. Bank-loan funds rose 1 percent, ranking second-to-last, while high-yield corporate bond funds rose 1.4 percent, ranking third-worst.
Bond funds that bet on the falling U.S. dollar did the best. The $197 million Rydex Weakening Dollar 2X Strategy, owned by Rydex Investments of Rockville, Md., climbed 17 percent. The $243 million Merk Hard Currency Fund rose 15 percent.
"Our fund was a pure play on the falling dollar," manager Axel Merk said from his office in San Francisco. "In a market where there is a global credit crisis, we find European currencies as the anchor of stability."
The worst-performing bond fund was the $190 million Regions Morgan Keegan Select High Income, which plunged 59 percent because of losses tied to subprime mortgages. It is managed by Jim Kelsoe at Morgan Asset Management Inc., of Memphis.
Managers focused on Asia, excluding Japan, and Latin America had the top non-U.S. funds, posting average gains of 48 percent. Asian funds benefited from China and India, the fastest-growing economies. The AIM China I Fund, managed by Houston-based AIM Advisors Inc., soared 79 percent to place first. The MSCI Emerging Markets Index rose 39 percent.
CGM Focus Fund
Up 81 percent in 2007.
Weatherford International Ltd., Cia Vale de Rio Doce, Cnooc Ltd., Vimpel-Communications, Potash Corp. of Saskatchewan Inc.
SOURCE: Bloomberg News