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Kathy Panagopouloskathy.panagopoulos@morningstar.com
And the Bear Goes On, Says Morningstar of Third-Quarter Fund Performance

CHICAGO, Sep 30, 2002 – Domestic-stock funds fell about 15 percent on average during the third quarter, according to Morningstar's special Quarter in Review report on Morningstar.com, the firm's investment Web site.

"Nebulous profit outlooks, second thoughts about the state of the economy, and the insidious tentacles of corporate scandal lashed the stock market to pre-Internet bubble lows in July," said Russel Kinnel, director of fund analysis for Morningstar, Inc. 

Third Quarter 2002 Fund Performance Highlights 
(data through Friday, Sept. 27):

  • ProFunds UltraBear (URPIX) was the best-performing fund during the third quarter, up 30 percent.    
  • Convertible funds performed the best among stock funds, but still declined 7 percent.   
  • Small-growth and technology funds fell to the bottom of the domestic-stock fund category, dropping nearly 19 percent and 24 percent, respectively.   
  • Latin America and Europe stock funds performed the worst among international stock fund categories, each slipping more than 17 percent. 
  • Long-term government-bond funds led all fixed-income fund groups, rising nearly 7 percent. 
  • Precious-metals funds finished the quarter in the red, declining nearly 7 percent, though the category had posted gains for five consecutive quarters. It's still the best-performing international-stock fund group and the best equity fund category overall for the year.

The Best
"With stock funds of all stripes falling hard, bear-market funds topped the performance rankings for the second quarter in a row," Kinnel added. "Virtually every type of equity fund that bet on stocks increasing in value languished."

Bear-market funds that performed well during the third quarter include Rydex Tempest 500 (RYTPX), gaining 29 percent, Rydex Venture 100 (RYVNX), increasing 23 percent and ProFunds UltraShort OTC (USPIX), up more than 22 percent. Each of these funds use short selling and other techniques to achieve returns in the opposite direction of the Nasdaq 100 or S&P 500 indexes, both of which took a severe beating during the period.

Investors sought real estate funds in the bear market because they have offered better yields than fixed-income funds, and better total returns than equity fund offerings. Top real estate funds for the period included Kensington Select Income (KIFAX), down more than 1 percent, Alpine Realty Income & Growth (AIGYX) and Phoenix-Duff & Phelps Real Estate Securities (PHRAX), each falling nearly 4 percent. 

The Worst
Slow information technology spending and overcapacity are still sapping technology company earnings. Small-growth funds, which tend to have higher concentrations of technology, biotechnology, and other risky stocks, didn't do well this quarter. The worst tech funds included the leveraged ProFunds Ultra Semiconductor (SMPIX), dropping 47 percent, Berkshire Technology (BTECX), and Berkshire Focus (BFOCX), each slipping 40 percent. 

The Latin America fund category, plagued by currency concerns and fears that a leftist candidate might win Brazil's presidential election, fell more than 21 percent. Some of the poor performers include Fidelity Advisor Latin America (FLTBX), losing nearly 24 percent, Merrill Lynch Latin America (MCLTX), declining 22 percent, and Excelsior Latin America (UMEAX), slipping 20 percent. 

Europe-stock funds also fell, losing 17 percent for the quarter. Some of the worst- performing funds in this category were Payden Europportunity (PEAGX), down 29 percent, FTI European Smaller Companies (FESCX), slipping 27 percent, and Smith Barney European (SBEBX), falling 26 percent.

Among bond funds, the best performers were those with the longest durations. However, not all bond categories performed well. Global, political, and economic uncertainties damaged emerging-market bond funds, which were down by almost 2 percent. A rash of corporate bankruptcies and debt downgrades, as well as fears of a double dip recession, dragged down high-yield bond funds, which fell 3 percent and were the worst-performing bond fund category during the third quarter. 

The worst emerging-markets debt funds were Offitbank Emerging Markets Select (OFFMX), down 2 percent, and Van Kampen Worldwide High-Income (MSWBX), losing 4 percent. The poorest high-yield funds included Quaker High Yield (QUHIX), declining 22 percent, Safeco High-Yield Bond (SAFHX), dropping 12 percent, and Excelsior High Yield (UMHYX), falling nearly 12 percent. 

For the most current data on more than 13,000 funds and 7,000 stocks, as well as in-depth analysis on the quarter's top investing news, go to Morningstar's Quarter in Review section:


About Morningstar
Morningstar, Inc. is a global investment research firm, offering an extensive line of print, software, and Internet-based products and services for individuals, financial advisors, institutions, and the media. The company is a trusted source for investment information, data, and analysis of stocks, mutual funds, exchange-traded funds, closed-end funds, and variable annuity/life subaccounts.

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