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COPYRIGHT 2001 Consumers Union of the United States, Inc.
It's been a trying year for equity mutual-fund investors. Everything that seemed to work so effortlessly as annual gains topped 20 percent over five successive years suddenly stopped in 2000. Once-high-flying dot-coms are dot-gone. Tattered, too, are many reliable blue chips, from AT&T to Xerox, which fell sharply. Even darlings of the technology sector and stalwarts of many fund portfolios, like Cisco Systems and Microsoft, suffered steep declines. Measured by the broad gauge of market performance, the Standard & Poor's 500 Index (S&P 500) tumbled 10.1 percent, the first yearly drop in that index since 1990.
The recent stock-market drubbing provided a rigorous test of some basic investing principles easily forgotten during flush times. First, it brought home the value of building a well-diversified portfolio with holdings in all major asset classes. While the market favorites--growth and high-tech stocks--floundered, several long-out-of-favor sectors--energy, natural resources, and real estate--posted solid gains.
The year also challenged the patience of investors who built their portfolio around a core of low-cost index funds. It proved to be one of those rare years when index funds fared worse, on average, than actively managed funds. Because they must remain fully invested in stocks whether the market is rising or slumping, index-fund managers could not retreat to the sidelines by increasing their cash holdings, as managers of more actively traded funds could.
But it's hard to argue with index funds' success over the longer term. Between 1950 and the end of 1999, an investment of $1,000 in an S&P 500 index fund would have grown to $276,000 after expenses and taxes, according to research underwritten by the Vanguard Group, a fund firm that champions index investing. The average managed fund would have netted a gain of just $65,000. That's why we continue to list index funds among the steadiest and most reliable performers for long-term investors.
Were investors' losses in 2000 a foreshadowing of more market tumult ahead? Or will the prospect of further interest-rate cuts by the Federal Reserve Board reinvigorate the market in 2001? We can't tell you--and neither can anyone else. But this annual report on equity mutual funds can help you chart a course through the thickets of assembling a balanced portfolio of equity funds that suits your long-term investment goals.
In this report, we explain the criteria we used to select funds across all major equity-asset classes and to identify the 100 that stand apart from their peers. The fund lists begin on page 34. In "Seeking the Right Family" (see page 27), we evaluate the investment offerings, customer services, and information...
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