Mutual Funds: Net, Small Caps Big Winners

Oct. 16 -- A year after Wall Street marked the end of its grueling bear market, stock mutual funds — particularly Internet and technology shares — are enjoying strong returns again. But investors should be careful about diving head first into these investments.

Since the main stock gauges hit multiyear lows on Oct. 9, 2002, the average return for U.S. diversified stock funds has climbed 40.5 percent through Oct. 9 of this year, according to fund tracker Lipper Inc.

That is ahead of the Dow Jones industrial average's 33 percent gain and the Standard & Poor's 500 index's 34 percent rise during the same period, although the fund performance trails the Nasdaq composite's 72 percent advance.

"By and large, people are optimistic the recovery is for real at this point," said Jeff Tjornehoj, research analyst at Lipper Inc. "But I would caution people not to swing their allocations too suddenly."

Tech, Telecoms, Show Gains

Smaller companies' shares were the big winners, with small-cap and mid-cap stock funds returning 54.3 percent and 46.4 percent, respectively, compared to returns of 33 percent for large-cap funds.

Broken down by sector, Internet and semiconductor funds dominated, led by offerings from ProFunds (returns averaging 188 percent to 311 percent); and Jacob (277 percent for its Internet fund).

They were followed by technology and telecommunications sector funds managed by companies such as Fifth Third (about 170 percent), Firsthand Funds (more than 140 percent) and The Oak Associates' Black Oak (133 percent).

"Investors have started pinning their hopes on businesses starting to pick up the slack," Tjornehoj said. "We had been a retail-driven, consumer-focused economy during the bear market. We're getting signs that business, especially the production side such as semiconductors … and Internet software services, are starting to get a foothold once again."

Similarly, small- and mid-cap funds tend to outperform in the early stages of an economic recovery as smaller companies often see more explosive growth than bloated, large companies with wide-ranging as well as international businesses, analysts said.