A ROCKY CLIMB

Fund investors profited in 1998, but not without some bumps. Here's what's up in 1999.

Mutual fund investors couldn’t help but be dazzled by a Houdini of a stock market in 1998. It was, after all, a year of high-wire drama, frightening falls, harrowing escapes, and, to cap things off, a happy ending. Yes, the Standard & Poor’s 500 did manage to end the year up 27%, but there was more than enough suspense packed in between the end of December and New Year’s Day to keep us all holding our breath.

Talk about a high-wire act. Stocks started 1998 off with a boom, as the S&P raced off to a 17% gain by mid-year, despite concerns that Asia’s economic quagmire was likely to suck in the U.S. economy. Initiated by economic difficulties in Russia, this changed in August when worries that corporate earnings were thinning, coupled with a Clinton presidency under siege, socked the market. The year’s previous gains were swiftly brushed aside and in little time, the S&P index found itself in negative territory, down 1.4%. Then, in late fall, Internet mania set in, turning the market another 180 degrees. Investors flocked to nearly any stock with a Web address, a computer chip or even a phone jack-a stampede which helped the market rebound strongly to end the year with its fourth straight finish above 20%.

Divide the market into segments, however, and you’ll see that 1998′s results were far from uniform. Thanks to the late-year blast off by computer and Internet shares, technology stocks computed a 72% gain for the year. A big year by pharmaceutical stocks, lifted health care shares to a 43% climb. Meanwhile oil prices caused energy stocks to skid, with the group posting a 2% decrease for the year. Airlines lost altitude and dragged transportation shares down 3% for the year.

That kind of disparity was also apparent between large and small company shares. Investors spent much of the year edgy over turmoil overseas and the prospect of slower earnings growth for companies at home. As a result, they stuck with familiar, dependable names that could deliver steady earnings such as Microsoft, AT&T and IBM. They also gravitated to such powerhouses as Pfizer and Dell with solid reputations for profit growth. But with the economy’s strength and direction under question for much of the year, the market neglected smaller, unproven companies whose shares languished for much of 1998. In fact, the S&P Small Cap 600, an index for the group, retreated 2% for the year.

Mutual fund holders couldn’t help but notice the difference. According to Morningstar, the Chicago firm that monitors the industry, large cap growth funds, the type that invest in big, household names, racked up a 36% gain on average. That’s not only a full 16 points above the S&P 500, but it marks the first time since 1993 that an entire fund category outdid the market benchmark. Things weren’t so peachy for small cap fund investors, however. The average small cap value fund fell almost 7% last year, while small cap growth funds managed only 5%.

DÉJA VU…AGAIN
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