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Equity Funds Lose $10B in '02, While Bonds Rake in $130B

Bond funds saved the day in 2002, netting the mutual fund industry $72 billion in inflows into all classes overall, according to year-end data that Lipper released last week.

While equity funds lost $10 billion, their first year of outflows since 1988, on the heels of the crash of 87, bond funds attracted a record $130 billion in 2002. Money market mutual funds also suffered during the year, losing nearly $50 billion in assets due to their low interest rates.

"With their bear-claw wounds still fresh and with uncertainly high, investors stayed in retreat towards the comfort of current income," said Donald Cassidy, senior research analyst at Lipper.

Lipper released December figures simultaneously, which indicated that "investors in mutual funds were as tightfisted as holiday shoppers," as Lipper put it. For the month, equity and money funds showed outflows of $5.5 billion and $37.2 billion, respectively, while bond funds recorded modest gains of $4.2 billion.

Bond buyers in December continued to favor short and intermediate bond funds and sell out of long-term bond funds. As well, gold-oriented funds, one of the few bright spots in 2002, continued to have strong inflows of $200 billion in the month, in anticipation of the Iraqi conflict. Natural resource equity funds, meanwhile, also benefited from the geopolitical situation, taking in $100 billion.

Break Out the Bubbly

Lipper also released a positive analysis of the so-called January effect, the theory that the first week of January foretells the market's actions for the rest of the year.

"The first week of the New Year gave a bubbly outlook for the possibilities of 2003," Lipper said. "Following an incredible opening day for equities [up 3.98%], the first full week of the year saw equities rise 1.43%. We may very well be seeing the January effect," Lipper said.

Leading the equity charge out of the 2003 gate were multi-cap growth funds, up 2.22% for the week after a "staggering" 5.57% gain on the first trading day of the year. The second-biggest winner was broad S&P 500 Index-objective funds, up 2.05% for the week and 5.44% on the first trading day.

Growth funds, meanwhile, rose 1.66% during the week, while value funds notched 1.42% gains.

Dusting off cobwebs from their long hibernation, science and technology mutual funds, up 5.97%, seemed to benefit the most from the revived outlook for the markets during the week. And on the heels of news that the FCC will loosen rules that have required larger networks to lease access to competitors at cheaper rates, telecommunications funds rose 4.69%.

"The U.S. economy seems in the process of trying to finish working off the excesses of the dotcom/technology/telecom bubble," Lipper analysts said. They expect consumers to continue to spend and the long-awaited capital spending to finally kick in.

Global Outlook Looking Good

From an international point of view, the U.S. markets should post the biggest gains this year, Lipper analysts predicted, followed by Europe, Latin America and Asia.

"With the U.S. dollar seemingly headed for a further decline of perhaps as much as 10%, international funds seem likely to benefit in both flow and performance terms," Lipper said.

"The majority view on 2003 is that the domestic equity market will end its string of three consecutive annual declines - but that the net gain will be moderate, probably under 10%," Lipper said.

As for what investment styles will benefit from all of this, Lipper expects value to lead the rally, followed by large-cap, with technology bringing up the rear.