Lower Fees, Higher Returns

Finally, it’s safe to open your mail again. Ever since the beginning of 2000, investors’ mutual fund statements have gone from bad to worse. From the second quarter of 2000 through the first quarter of 2003, the Standard & Poor’s 500 Index, the benchmark used by stock market professionals, was in the red eight times out of 12. And four of those quarterly losses were in double-digit figures. As the market tanked, so did virtually all stock funds.

In the second quarter of 2003, however, the S&P 500 gained more than 15%, its best performance since the fourth quarter of 1998 when it went up 21% and the bull market was still in stampede mode. A strong second quarter more than offset a weak first quarter, bringing the index’s total return to a satisfying plus 11.8% for the first half of 2003. “A broad rally lifted all boats,” says Brian Portnoy, a senior analyst at Morningstar Inc. in Chicago. “For the past five years, financial markets have been divided. If either stocks or bonds went up, the other group was down. In the second quarter of 2003 though, there was nothing but winners.”

These highlights emerged from the first half of 2003:

Virtually every fund category had positive returns, bond funds as well as stock funds. (A few bear market funds that bet against stocks were pounded.)

Stock funds beat the stock market. According to Morningstar, U.S. equity funds gained 12.9% in the first half, with 53% of all diversified domestic stock funds topping the 11.8% gains of the S&P 500.

International equity funds also had a solid first half, up just over 10%.

Bond funds continued to show positive returns, as they have since 1999. For the past three years, through June 3, bond funds have returned over 7% per year while stocks have gone in the other direction.

Stocks still look like winners for long-term investors. For the past 10 years, through the first half of 2003, domestic stock funds have returned almost 8% a year, while bond funds have returned less than 6%.

Growth funds generally beat value funds in the first half, while specialized technology funds led all categories, up nearly 24%. Nevertheless, this year’s leaders were clawed the most severely during the long bear market, so they’re still way off their peak values.

Will the gains continue the rest of the year? Or will the second-quarter spurt prove to be a bear trap, as it’s been in the past? In the last quarter of 2001, for example, stocks gained over 10%. But 2002 turned out to be the market’s worst year since 1974.

No one can predict the future, but there are steps mutual fund investors can take to improve long-term returns:

Lower your costs, raise your returns. “Rule No. 1 for mutual fund investors is to buy inexpensive funds,” says Portnoy. “Most investors are very cost conscious when it comes to buying a dishwasher or a stereo but not when buying funds. The information is readily available, online or from a fund, and it’s